Compromise Agreements | Questions and Answers

What is a compromise agreement?

A compromise agreement is a legally binding contract entered into by an employer and employee which once signed and formally completed prevents the employee from starting or continuing with any employment tribunal or court claim arising from his or her employment and its termination. Compromise agreements are a very common feature of human resource management used by most employers when they want to settle an existing or potential employment law related claim.

Is a compromise agreement different from a severance agreement?

In most cases no. A severance agreement is just a different name for a compromise agreement. A severance agreement is commonly used when dealing with the departure of a senior executive or a director. On this web site the term compromise agreement includes severance agreement. We routinely deal with both.

What types of claims are covered in the compromise agreement?

All actual or potential claims which you may have against your employer will be incorporated into the terms of the agreement, including claims for wrongful dismissal arising from a breach of your contract of employment and all relevant statutory claims for example unfair dismissal and discrimination.

Why do I have to see a solicitor before signing?

The relevant legislation makes it mandatory that the employee obtains independent legal advice before signing the agreement. This is to ensure the employee is not being asked to sign an unfair or unreasonable agreement because once signed you are prevented from pursuing any claim against your former employer. (As alternative to seeing a solicitor, you may be able to see a suitably certificated trade union official, but by seeing a suitable qualified and experienced solicitor you can be assured that you will receive the right advice.)

I have done nothing wrong to deserve losing my job - can my employer make me sign a compromise agreement?

Employers use compromise agreements for two main reasons; first to settle an existing or anticipated employment tribunal claim. The employer may accept or at least know that it has dismissed unfairly or has discriminated against the employee. It makes commercial sense to settle the case and minimise the time, legal and management costs and publicity of defending the case at tribunal. Terms of settlement will be recorded in a compromise agreement.

The second use is where an employer has identified the need to move an existing employee out of the business. The justification may be that performance is an issue or that his or her skill base no longer fits in with the future plans for the business. The employee has done nothing wrong which could justify a fair dismissal. Here, it is an option for the employer to make the employee a severance offer to go on agreed terms. If the final offer is correctly calculated and the terms of settlement are reasonable, you may be best advised to accept the terms and leave your employment. There is little point in proceeding with a tribunal claim when the terms on offer are as good as or better than what you may recover as compensation at the tribunal.

Who pays my legal fees?

Although your employer is under no obligation to contribute to your legal fees to be incurred in obtaining advice about the terms and effect of the compromise agreement, most employers will offer to pay a contribution towards the employee's legal fees and VAT. You may be fortunate and your employer will agree to pay all of your fees subject to agreeing a cap. The size of the contribution is normally open for negotiation. In the absence of an employer's contribution you will be liable to pay for your legal fees.

How much should my legal fees be?

This all depends on the complexity of the issues to be resolved and possibly on the value of the financial compensation. Once we know what is involved and how much work we may have to do, we will discuss and agree with you a budget for legal fees. Generally the more time we have to spend on dealing with the negotiations and the wording of the agreement the more your legal fees will be. We will not however waste time on non-points and reaching a counsel of perfection with the drafting if this is not required to protect your best interests.

How do I know if my employer's compensation offer is a good one?

This is a key role for us. We will always assess the offer and do our own calculations to work out if it is too low or defective in some other way. We have to be sure that the offer is acceptable both from a financial point of view and that the terms of the offer are fair as set out in the compromise agreement.

The compromise agreement is headed up "without prejudice" and "subject to contract". What does this mean?

Without prejudice means that the fact and the terms of the offer cannot be referred to at a subsequent tribunal or court hearing provided the statement was made in a genuine attempt to settle an existing dispute.

Subject to contract means that the offer and the compromise agreement are not binding until the compromise agreement has been agreed and formally completed between the parties. This means that at any stage until completion either party can withdraw from the negotiations and not proceed.

How much of my compensation can be paid tax free?

This depends on the terms of your contract of employment or service agreement. Part of our role is to advise you about the tax and national insurance contributions that may apply and how these may be avoided or reduced. In many cases up to £30,000 can be paid free of all deductions, but this is not automatically the case.

Can I get an agreed reference as part of the agreement?

Yes, in most cases the employer will provide an agreed reference.

How long will it take to complete my compromise agreement?

Each case is different but it all depends on a wide range of factors, including the employer's time scale for completion and what issues remain difficult or time consuming to resolve. We can normally proceed as quickly as the parties require. We have completed a compromise agreement within two hours of being instructed but the norm is somewhere between one and two weeks. We will not seek to unnecessarily delay progress.

What terms and conditions can be included in a compromise agreement?

The contents of a compromise agreement or a severance agreement vary greatly. There is no such thing as a standard agreement because in most cases each case is different from the last. Apart from dealing with the financial compensation to be paid additional clauses as appropriate will cover:

• The termination date
• Provision of garden leave during any period of notice
• Payment of salary and other benefits until the termination date
• Holiday pay
• Fringe benefits
• Pension rights
• Resignation from all directorships
• References
• Offer of out placement counselling
• Tax treatment of the payments
• Confidentiality
• Waiver of all contract and statutory claims
• Repayment clauses
• Employee's tax indemnity
• Restrictive covenants
• Agreed announcement or press release
• Return of employer's and employee's property
• Legal fees
• Repayment terms in event of breach by employee.