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Compromise Agreements – A Guide

You may be asked to enter into a compromise agreement if your contract of employment is terminated under certain circumstances, such as redundancy or dismissal, or if you are involved in an employment related dispute.

This fact sheet is designed to be a helpful guide for anyone looking for advice about compromise agreements. If you are a member of a UK trade union, you may be entitled to advice and assistance through your scheme, so it would be best to contact your representative in the first instance.

Compromise Agreements
Why a Compromise Agreement is Used
Dismissal
Unfair Dismissal
Redundancy
What if I Sign a Compromise Agreement?
Compromise Agreement Confidentiality
Possible Claims After Signing a Compromise Agreement
Tax and Compensation Payments
Can a Person Speak Freely About Their Employer Following an Agreement?
Talking To The Press
References From Your Employer
The First Steps
Fees and Payment
Our Service To You

Compromise Agreements

A compromise agreement outlines the terms and conditions agreed upon by an employer and employee when a contract of employment is going to be terminated.

Sometimes, a compromise agreement is also drawn up as part of a dispute resolution or to settle an Employment Tribunal claim.

It is a legally binding document.

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Why a Compromise Agreement is Used

A number of issues will be dealt with in a compromise agreement, including payments for redundancy, unpaid wages, bonuses, pay in lieu of notice and any holiday pay entitlement. It is designed to provide definite information for both the employer and employee.

One of the main functions of a compromise agreement is to prevent an employee from making any future claim against their employer through an Employment Tribunal. In accepting the terms of an agreement and signing to confirm this, you are foregoing your right to do so.

It is therefore important that anyone entering into a compromise agreement fully understands the implications. It is actually a requirement that you receive independent legal advice from a qualified person before signing, for example a solicitor or a trade union adviser with the relevant qualifications and insurance in place.

Often the employer will pay the expenses for this advice, either in full or in part.

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Dismissal

If an employer ends an employee’s contract of employment, either with or without notice, this is known as a dismissal.

There are a number of circumstances that would be considered a dismissal, for example if a contract is terminated on the grounds of employee misconduct, a redundancy or if a fixed term contract ends and is not renewed.

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Unfair Dismissal

An employer has to be able to show that the reason for dismissing an employee was fair and the decision to do so was reasonable. For example, if an employee is dismissed as a result of improper conduct,

A dismissal should always be made in accordance with statutory procedures, so it must also be shown that this was the case.

If an employer can not show that they dismissed an employee fairly, it may be held that the dismissal was unfair.

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Redundancy

When there is a cessation or reduction of a particular type of work within a company, there will often be redundancies. A redundancy is the termination of an employee’s contract when there is no longer a post for them.

For example if a business closes altogether, or one department shuts down, some employees may no longer be needed. A similar situation may arise if an organisation is restructured.

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What If I Sign a Compromise Agreement?

The main legal implication of signing and accepting a compromise agreement is that your right to claim against your employer via an Employment Tribunal, or through a Court, is specifically excluded.

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Compromise Agreement Confidentiality

Dependent upon the terms and conditions of your compromise agreement, you may or may not be permitted to tell people that you have entered into an agreement, or what it includes.

It is common for a confidentiality clause to be inserted into a compromise agreement. The clause may cover only the terms of that agreement, so that you can tell people that an agreement has been made but not divulge any details. In some cases however, the employer may insist that you do not tell anyone about the agreement at all.

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Possible Claims After Signing a Compromise Agreement

As a rule, there are only three types of claim that can still be made after a compromise agreement has been signed. These are:

1. Personal Injury – This type of claim is generally still allowed, excepting claims for injuries that were already existing at the time the agreement was signed. If the termination was due to absence for stress or depression, it is unlikely that the claim would be allowed.

2. Pension Rights – A claim for accrued pension rights should still be possible.

3. Breach of Contract – If your employer breached the terms and conditions outlined in the agreement.

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Tax and Compensation Payments

Tax may be payable on certain elements of the payment made to you under the terms of your compromise agreement. In most cases, tax and national insurance would be payable on any holiday pay and wages.

Redundancy payments of up to £30,000 are usually tax free, whether contractual or statutory. Continued benefits (for example the extended use of a company car) are also generally tax free.

Payments in lieu of notice may also be tax free, so long as the employer does not make such payments as a matter of course in redundancy cases. This is also on the understanding that they do not have a contractual right to provide pay in lieu of notice.

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Can a Person Speak Freely About Their Employer Following an Agreement?

In some cases, a compromise agreement will include a ‘non-derogatory statements’ clause. This is designed to prevent an employee from speaking ill of the employer or related individuals such as former colleagues.

It is therefore important to be mindful of what you say about an employer, especially in public. When an agreement is negotiated, it may be possible to agree that the clause be written so that neither party is able to make derogatory statements about the other.

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Talking to the Press

Anyone who has signed a compromise agreement should always seek legal advice before speaking to the press about what has happened.

Your right to do so would depend upon the types of clause written into the agreement about confidentiality and non-derogatory statements.

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References From Your Employer

Any reference that your employer does provide should be accurate, correct and a fair representation. If it is not, they could be found guilty of misrepresentation.

There is not, however, any legal obligation for an employer to provide a reference. It may therefore be advisable to have a reference included as part of the compromise agreement. This should be dealt with in the early stages of negotiations.

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The First Steps

For advice from our expert employment solicitors, you should complete the questionnaire and send it to us by email or post at the addresses shown below:

Email: compromiseagreements@thompsons.law.co.uk

Post: FAO - Compromise Agreements, Thompsons Solicitors, The New Union House, 2 Harbour Avenue, Plymouth, PL4 0BJ

If you are not able to complete the questionnaire online or print it off yourself, contact us on 0800 0328511 and we will post a copy to you. When we receive the completed questionnaire, you will be contacted directly.

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Fees and Payment

Employers should cover the cost for your advice on your compromise agreement. The usual charge is £350+VAT. If a payment has been agreed then simply complete the questionnaire and send it to us by email or post at the addresses shown above.

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Our Service To You

A specialist employment solicitor will consider the terms and conditions detailed in your compromise agreement. They will then provide you with written advice and contact your employer to negotiate any amendments if necessary.

You will have the opportunity to speak to a solicitor should you require any specific advice.

If the agreement is acceptable and all parties are happy with the wording, the solicitor will sign the compromise agreement themselves and arrange it to be signed by you and your employer.

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