The UK's Leading "Do it Yourself" Legal Website

Compromise Agreements

Welcome to the DYJ guide to compromise agreements. In this section we introduce the basic principles of compromise agreements and explain why this is one area where even the most ardent DYJ’ers will need to seek professional help. Its okay though, because in most situations that professional help is free.

What is a Compromise Agreement?

A Compromise Agreement is a legally binding agreement dealing with the termination of your employment. It often provides for a severance payment by your employer, in return for which you agree not to pursue any claim you may have to an employment tribunal or court. Quite often, the compromise agreement will also deal with the notice element in your employment contract and may provide for payment to you in lieu of working your notice period.

Compromise agreements are increasingly being used as a means of preventing future complaints to an employment tribunal or court, especially in redundancy situations.

Compromise agreements are recognised by statute and are one of only two ways that a claim can be legally binding without tribunal proceedings having been commenced.

Can I do it Myself?

Unfortunately for DYJ’ers this is one area where you are not able to do it yourself. Under the Employment Rights (Dispute Resolution) Act 1998, you must receive independent advice on the terms of the agreement. That advice can only be given by a qualified lawyer, a qualified trade union official, or a qualified advice centre worker, all of whom must be covered by appropriate indemnity insurance. Without that advice and a certificate signed by the adviser, confirming that the advice has been given, the compromise agreement is simply not valid.

Compromise agreements can be written in very legalistic language and can refer to sections of Acts and Regulations which you may never have heard of. It is because of this and the importance of you understanding the effect of the agreement, that it is a legal requirement that you obtain advice on what the agreement means. 

A specialist compromise agreement solicitor will advise you if the terms of the agreement offer you the correct protection and will also advise you if you are being offered a suitable amount of compensation.

Why is a Compromise Agreement Necessary?

Using compromise agreements in redundancy situations is a fairly recent development and has been brought about mainly by employers who want to prevent employees complaining to a tribunal after they have been made redundant.

If an employer fails to comply with the law in making redundancies (through 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.

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

Sometimes an employer will insist on a compromise agreement being signed when the employee is leaving by mutual agreement, just to ensure that there can be no subsequent claim made.

It is rare that the compromise agreement is for the benefit of the employee, save for clauses that provide for confidentiality. The whole basis of the agreement is the protection of the employer from potential claims.

What does the Agreement Contain?

The compromise agreement will state the full 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 can be paid without deduction, but you will have to provide a tax indemnity to your employer within the agreement.

The compromise agreement will normally provide for confidentiality both in terms of your employer’s trade secrets and also of the terms of the agreement. You may 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 prefer such agreements to be mutual, and employers are often receptive to such request.

The compromise agreement may confirm any existing post-termination restrictive covenants that you are already bound by under your employment contract. In some cases, the covenants are new, having appeared in the compromise agreement for the first time. In either case, you need to take specific advice on this as your ability to work for a competitor and/or to service old clients and customers could be restricted after you leave.

There will usually be a long list of Acts of Parliament in the compromise agreement and many more, under which you will agree not to bring a claim. You should not be concerned by this. The compromise agreement is intended to be in full and final settlement of all claims, but the employer needs to list these to be able to enforce the agreement.

There is no legal or other obligation on you to sign a compromise agreement if you are not happy with it.

At its simplest, refusing to sign means that there is no agreement between you and your employer, and you are free to make a claim to the employment tribunal (which must be commenced within 3 months of your termination date). In redundancy cases, however, this could mean that your employer might refuse to pay you the full enhanced package and will instead pay the minimum state entitlement. In non-redundancy cases, what you are putting in jeopardy is any ex-gratia payment being offered.

Many compromise agreements are, however, capable of being negotiated to improve the terms and a good compromise agreement solicitor will examine the proposed terms and enter into negotiations on your behalf. In some cases, a tribunal claim may still be necessary.

If you wish to reject the compromise agreement and bring a claim against your employer, you are free to do so. You can either do that yourself or get an employment solicitor to do it for you on a no win-no fee funding basis.

Once a compromise agreement has been signed by all parties, any agreed compensation will usually be paid within 14 to 28 days. Sometimes, it goes through in the next company pay run. The payment date will be specified in the agreement.

Do you have to Pay for a Compromise Agreement?

The simple answer is ‘no’. Most compromise agreements contain a clause in which the employer promises to pay your fees for receiving the legal advice that is required, up to a certain limit (often between £250 and £500 plus VAT), depending on the complexity of the compromise agreement. If such a clause is not included, you should refuse to sign the compromise agreement and negotiate better terms.