Compromise agreements

[divider top=”0″] What is a compromise agreement?

A compromise agreement is a legally-binding agreement. It is a specific type of contract between an employer and an (ex-)employee which is used when the employee’s contract of employment terminates (i.e. when the employee leaves their job). It is regulated by statute.

[divider top=”1″] What is the purpose of a compromise agreement?
  • Provides you with some form of consideration (compensation), usually a sum of money or some other form of contractual benefit
  • In return for the employee agreeing to waive any statutory or common law claim they may have against their employer
[divider top=”1″] What claims can be waived under a compromise agreement?

A variety of claims can be waived under a compromise agreement. The most common claims include, though:

  • Discrimination
  • Harassment
  • Sexual harassment
  • Unfair dismissal
  • Constructive dismissal
  • Breach of contract

Compromise agreements are particularly common in cases involving redundancies.

[divider top=”1″] Why do employers use compromise agreements?

Employers use compromise agreements as a means of:

  1. providing them with certainty regarding an employee’s conduct after they leave their employment
  2. limits their liability relating to future claims
  3. reduces their costs relating to defending Employment Tribunal and civil court claims
[divider top=”1″] Why is a compromise agreement necessary?

Compromise agreements are not strictly necessary in any circumstance. However, they are beneficial to both employers and employees in a variety of situations, not least those where a redundancy has taken place or is to take place. However, the use of compromise agreements in redundancy situations is a relatively recent development.

Compromise agreements are seen to be necessary (or, more accurately, useful) to employers for the reasons specified above:

  1. The certainty they provide
  2. The fact that it limits their liability; and
  3. The fact that it reduces their costs

Further, in redundancy situations (and potentially in other situations involving disciplinaries or grievances) the use of a compromise agreement can reduce the administrative burden that entails following the necessary procedural requirements. For example, in a redundancy situation the employer could fail to carry out the correct procedure (i.e. consultation process, fair and objective redundancy criteria etc.) but prevent themselves from incurring any liability due to the compromise agreement. However, employers do tend to carry out the correct procedure as this means that they’re protecting themselves should the employee refuse to enter into the compromise agreement and enter an Employment Tribunal claim against them.

Read more: Learn about the law relating to redundancy

[divider top=”1″] What terms does a compromise agreement have to contain?

The general requirements for a compromise agreement are that:

  1. It is in writing; and
  2. The compromise agreement must relate to clearly identified particular proceedings; and
  3. The employee receives independent legal advice from a relevant adviser who has professional indemnity insurance

However, your compromise agreement will normally contain the following specific terms (among others):

  1. The full breakdown of the payments that you are to receive as a result of the agreement
  2. The tax liability that you’ll incur under the compromise agreement
  3. A statement that the first £30,000 of the compromise agreement which relates to non-contractual payments made as a result of the termination of your contract of employment will be tax-free
  4. A small payment for any new restrictive covenants or confidentiality clauses agreed to
  5. A clause stating that you won’t make any derogatory statements about your employer and that your employer won’t either (or will make reasonable endeavours not to)
  6. A confidentiality clause
  7. A clause stipulating that you should return all property belonging to your employer before the termination date

Read more: 8 questions you should ask a compromise agreement solicitor

[divider top=”1″] Will I pay tax on the money I receive under my compromise agreement?

You’ll have to pay tax on the following types of payment (among others):

  • Salary payments
  • Your bonus
  • Any payment in lieu of contractual notice

You won’t have to pay tax on any non-contractual payment made as a result of the termination of your contract of employment. This includes (among others);

  • Damages for wrongful dismissal and payment on account of damages
  • Compensation for unfair dismissal
  • Payment of statutory and non-statutory redundancy pay
  • Compensation for discrimination (if connected to the termination of your employment)

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