Compromise Agreements
What is a compromise agreement?
Compromise agreements are normally used by employers either before, at the time of or after terminating or varying an employee’s contract of employment.
The object of a compromise agreement is to provide the employee with certain benefits under the agreement, usually a severance payment and a guaranteed reference, in return for an agreement not to pursue a claim against the employer in the future.
Advantages to the employer
1. It can enable the employer to end the employment more quickly
2. It can enable the employer to dispense with some or all of the formal procedures which would otherwise be necessary to fairly dismiss an employee
3. It guarantees that the employer will not have to face an Employment Tribunal or Court claim
4. An employer can protect itself against having business or employees taken by the employee in the future by including “restrictive covenants.”
5. An employer can protect its reputation by including a clause that the employee will not make any derogatory statements about the employer
6. The employer can require the circumstances surrounding the termination of the employment to be kept confidential
Advantages to the employee
1. Obtain a severance payment more than they would otherwise be entitled to
2. Not have to pay tax or national insurance on the first £30,000 of the severance payment
3. Have a guaranteed reference
4. Can keep the circumstances of the termination of employment confidential
5. Receive payment a lot quicker than it would take to pursue a Tribunal claim
6. Have their legal fees paid by the employer
Compromise Agreements which vary a contract
Although compromise agreements are usually used to end an employment contract, sometimes they can be used to vary the contract. In other words an employer may seek to offer an “up front” payment to employees in return for them agreeing less favourable terms and conditions.
Risks to employers
An employer should always take care when offering a compromise agreement. An employer can end up giving an employee who rejects a compromise agreement a stronger potential claim if the employer has committed themselves to a particular course of action. It may be more difficult to show a dismissal is fair if a compromise agreement was offered first.
Formalities to make the agreement valid
To enable a compromise agreement to be effective, it has to be correctly worded and must provide for the employee to obtain independent legal advice from a solicitor or other qualified advisor who must sign the agreement to confirm they have advised the employee. Normally, although the employee can choose the adviser, the employer pays because it is in the employer’s interests to have a legally binding agreement.
Role of the employee’s legal adviser
The legal advisor is not simply “rubber stamping” the agreement, they are advising the employee, and the advice may be to reject the offer or to negotiate a better offer or amend wording of the agreement. However, the employee has the final say.
Disclaimer
Please note that the information on this page is intended to be a guideline and is therefore a summary of the law only and not a complete guide. Before taking any action based on this information you are strongly advised to take legal advice. Whilst every effort has been made to ensure that the information contained on this page is up to date and accurate, no guarantee can be given to this effect.