What is a Compromise Agreement?

A ‘compromise agreement’ is the “old” term for what is now know as a settlement agreement. Compromise agreements were re-named in 2013, but many people (including some lawyers!) still refer to them as compromise agreements.

A compromise agreement is a legally binding agreement which is made at, or just after, the termination of your employment. It usually provides for a payment of compensation by your employer, in return for which you agree not to pursue any employment-related claim you may have. The compromise agreement will also usually make provision for your right to notice and may provide for a “payment in lieu”, so that you are paid without working your notice.

Employers use compromise agreements to prevent future complaints to a tribunal, especially where they have made an employee redundant. Compromise agreements are the only way that a payment of compensation for loss of employment can be legally binding, without tribunal proceedings having been initiated. In order for the agreement to become binding, you must receive advice on the terms of the agreement from an independent solicitor. The solicitor who advises you must also sign the agreement to certify that appropriate advice has been given.

Why is a Compromise Agreement Necessary?

An employer will offer a compromise agreement to prevent an employee complaining to a tribunal after he has been dismissed.Usually, the employer suggests that the employee enter into an agreement in exchange for a sum of money. The discussion about a possible compromise can arise in a variety of ways; a common one is where an employer wants to make an employee redundant.

If an employer does not comply with the law relating to redundancy (perhaps failing to consult properly, failing to use fair selection criteria etc) an employee can complain to a tribunal that the redundancy was unfair. This can be done after the redundancy and could result in an award of compensation or even reinstatement to the job.

The only way an employer can be sure that an employee will not complain to a tribunal after redundancy is to persuade him to sign away his right to do so. This can be done in a compromise agreement and has the effect of turning the redundancy package into a final settlement of any claims the employee has against the employer.

Compromise agreements are also commonly used in employment situations other than redundancies and have the same “full and final” effect.

It is quite possible for an employee to raise the question of a compromise. For example, if the employee has made a formal complaint to the employer, and it is going to be very difficult for the employer to put things right, the employer might prefer for the employee to leave and receive some agreed compensation.

What terms does a Compromise Agreement have to contain?

The compromise agreement will contain a breakdown of the payments you are to receive and the extent to which the sums will be
paid free of tax. Usually, up to £30,000 compensation for lost employment can be paid without deduction, but you will have to give a tax indemnity to your employer within the agreement.

The compromise agreement will usually provide for confidentiality, both in relation to your employer’s trade secrets and business affairs and also to the terms of the agreement. You will be paid a small additional sum for agreeing to this. You will also usually be required not to make any derogatory comments against your employer. Some employees ask for such clauses to be mutual.

The compromise agreement may confirm the existing post-termination restrictive covenants that you are already bound by under your
contract of employment. In some cases, the covenants are new, and appear in the compromise agreement for the first time. In either
case, you need to take expert advice on this as it may affect your ability to work for a competitor and/or service former customers after you leave.

The agreement will contain a long list of legal provisions (statutes and regulations such as the Sex Discrimination Act and Employment Rights Act) , under which you will agree not bring a claim. You should not be concerned by this; your employer needs to list these in order to be able to enforce the agreement.

Why do I have to have a solicitor?

Compromise agreements contain very legalistic language and can refer to sections of Acts and Regulations of which you may never have heard. You need to understand the effect of the agreement, as you will be signing away certain rights, so it is a legal requirement that you receive professional advice on what the agreement means and how it will affect you. It is also a legal requirement that your adviser signs the agreement to confirm that appropriate advice has been given.

That advice may be given only by a qualified lawyer, a qualified trade union official, or a qualified advice centre worker, who must be covered by an appropriate certificate of indemnity insurance . A solicitor who is an expert in employment law will advise you if the terms offer you sufficient protection; you should also be advised whether you are being offered sufficient compensation. Many factors have to be taken into account in determining if the compensation is adequate.

How much will the legal advice cost?

It should cost you nothing to receive advice in relation to the compromise agreement, including any amendments to the compromise agreement wording. This is because your employer will usually foot the bill and pay us directly.

When will I receive the amount due under the Agreement?

Once a compromise agreement has been signed by all parties, any agreed compensation will be paid within the time specified in the agreement – usually 14 to 21 days. Sometimes, the payment is made in the next company pay run.

What happens if I do not agree to the terms offered?

You do not have to sign a compromise agreement if you are not happy with it. If you refuse to sign, you are free to make a claim to the employment tribunal (which must be made within 3 months of your termination date). In redundancy cases, a refusal to sign might mean that your employer would refuse to pay you an enhanced redundancy package and would instead pay the minimum statutory entitlement. In non-redundancy cases, your refusal to sign would put at risk the ex-gratia payment being offered.

However, it is often possible to negotiate a better termination package than is initially offered. I have an excellent track record of negotiating improved compromise deals for my clients.

Another option, if negotiation is not possible, or fails, is to reject the compromise agreement and bring a claim against your employer. I can advise you on the implications of that and discuss funding with you.

If you have any further queries, or wish to discuss how to proceed, please contact me:

Stella Yeomans 07717 281317, or go to the “contact me” tab above, to send an email or contact request.