Compromise Agreements – a quick guide

Redmans is an award-winning firm of specialist employment law solicitors, acting for UK employees and senior executives. We are one of the only law firms in the UK that specialises solely in employment law and we have a very high success rate (usually without the requirement to issue an Employment Tribunal claim).

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If you have been offered a compromise agreement then you’ll need to get advice on this – our expert employment lawyers have therefore provided a brief guide to compromise agreements

What is a compromise agreement?

A compromise agreement is a legally binding agreement (either during or following the termination of employment), between an employer and employee under which the employee agrees to settle their potential claims in return of the employer agreeing to pay financial compensation.

The employer makes a one-off payment in exchange for the employee agreeing not to make an Employment Tribunal claim. These agreements are designed to end employment in an amicable way, and maintaining the employment relationship.

When you are offered with a compromise agreement, you must carefully consider your options.

Under the ACAS code, you will be given a minimum period of 10 days to seek independent legal advice and consider the offer made by your employer.

You can get advice from your solicitor and negotiate a better offer, however if you and your employer cannot reach a mutual agreement, you can make a claim against your employer in the tribunal. The time limit to make a claim is of three months minus one day from the date of termination of employment. If the claim is for statutory redundancy pay, then the time limit is six months minus one day.

What is the difference between a compromise agreement and settlement agreement?

There is little to no difference between a compromise agreement and settlement agreement. Employers use both the agreements in exactly the same way.

In July 2013, the Enterprise and Regulatory Reform Act 2013 (ERRA) changed the name of compromise agreement to settlement agreement, on the basis that the language used, more accurately reflected what the agreements were (for example, it is a settlement rather than a compromise of a claim).

When might a compromise agreement be offered?

Employers offer a compromise agreement when they would like to terminate a contract on mutual, agreed terms with you. They would like to offer a clean break to ensure there is no opportunity for you to take them to a tribunal.

Compromise agreements may be offered in situations where the employer would like to avoid going through a performance, disciplinary or redundancy process, as these are costly and time consuming.

An employee may also request a compromise agreement if they feel they are being managed out of the workplace.

What do compromise agreements include?

Compromise agreements generally include the following:

  • Amount of settlement payment (e.g. lump sum, several months salary and pension contributions)
  • Date and reasons for termination
  • Confirmation of legal advice received
  • Waiver of claims
  • Agreed reference.

What are the legal requirements for a compromise agreement to be valid?

In order for a compromise to be legally binding, the following must be met:

  • The agreement must be in writing
  • The agreement must relate to a particular issue or complaint
  • The employee must have received legal advice from an independent adviser
  • The independent adviser must be named
  • The independent adviser must have insurance or professional indemnity insurance covering the risk of a claim against them by the employee for the advice
  • The agreement must confirm that the conditions regulating the compromise agreement have been met.

What are the benefits of a compromise agreement?

There are several benefits of a compromise agreement, however the main benefit is the fact that there is a ‘clean amicable break’ with your employer. Employees tend to receive an incentive to sign the agreement, such as ex-gratia payment and payment in lieu of notice.

You will also probably receive a good employment reference and there will be a clear exit for both parties.

Another key benefit is that compromise agreements are hassle free, you can avoid the stress and risk of litigation through the Employment Tribunal.

How to negotiate a good settlement

As an employee, your priorities in negotiating a compromise agreement should be to ensure the financial compensation you are seeking is realistic and fair; and that your employer should agree to providing you with a good reference. You must also bear in mind the costs and complexity of the implications of taking your case to an Employment tribunal and therefore it is important to factor in your legal rights and how much you would be likely to receive as compensation if you took your case to the tribunal.

Before you start negotiations, you should have a good idea of the amount of compensation you are seeking. When you conduct negotiations, (generally by email), you should state that you are discussing this ‘without prejudice’ and therefore your discussions are off the record and cannot be used at an Employment Tribunal.

Whilst negotiating a good settlement, it is important to carefully check the terms of any agreement offered and to remain calm throughout the negotiation process.

It is a legal requirement to seek independent legal advice before signing a compromise agreement.

It is in the best interest of an employee to instruct a specialist employment solicitor to help them better understand the outcome on the terms of an offer and the risks involved.

What types of claim cannot be settled by a compromise agreement?

The following statutory claims cannot be settled by entering into a compromise agreement:

  • Personal Injury claims
  • Pension claims; and
  • Claims following the transfer of a business.

Who pays the legal fees for a compromise agreement?

Your employer normally pays your legal costs in full. The proposed agreement contains a clause confirming the legal costs will be covered your employer. The amount of this contribution is usually capped between £250- £500 plus VAT.

If you would like to receive further advice and negotiate a better deal, it will be charged to you, however most solicitors try to cover their fees by seeking payment from your employer.

When will I receive my payment under the compromise agreement?

Compensation is usually paid within 7-14 days after both parties have signed the compromise agreement. Some payments will be made through usual payroll.

Do I have to sign a compromise agreement?

Compromise agreements are voluntary and you can refuse to sign the agreement. If you do not sign the agreement, then you preserve your full rights to make a claim against your employer.

If you have received advice and you do not go ahead with the compromise agreement, your employer will not make any contribution to your legal fees, and these will most likely be payable by you.

If you do sign the agreement, you will not be able to make any future claims against your employer in the tribunal in relation to the matter(s) covered by the compromise agreement.

You must ensure you receive independent legal advice on the agreement.

Are compromise agreements tax free?

Compromise agreements are generally tax free but it depends on the type of payments you receive as your settlement. The first £30,000 compensation is tax free as long as no contractual payments are included in this payment.

If the settlement exceeds £30,000, you will in most cases be liable to pay tax.

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