Compromise Agreements

What is a Compromise Agreement ?

A Compromise Agreement is a method of terminating an employment contract by consent. Such agreements have become very common since they provide certainty from an employer’s point of view in terms of avoiding disputes and wasted employment tribunal defence costs. From an employee’s point of view, such agreements can be useful because the employer will normally pay some extra tax free money, known as an ex gratia or compensatory payment, in addition to contractual and possibly statutory entitlements, as an inducement for the employee to sign.

Why is it necessary to have a Compromise Agreement ?

Compromise agreements are the only safe way to terminate employment from an employer’s perspective. Such agreements are generally standardised. Compromise Agreements were created by the Government, frankly for political reasons (to save public funds due to an exponential rise in Tribunal claims which are free to make). In summary, to obtain an enhanced payout, it is necessary for both employer and employee to do this by way of compromise agreement.

Compromise Agreements are used in many situations, such as redundancy, possible unfair dismissal claims and termination due to extended sickness absence. The ex gratia amount offered does vary but typically is in the region of perhaps 3 months salary equivalent, generally tax free. It can be possible to negotiate on the amount offered, and this is where the employment lawyer who must be retained by the employee (see below) can add some extra value.

What does the Agreement Contain ?

As stated above, these agreements are quite standard. In order to be legally valid in accordance with the statute which created compromise agreements, about 80-90% of the Agreement will be standardised, stating at length all of the various types of claims the employee contract out of making. The agreement will specify the payments the employee will receive and which elements are compensatory, and therefore in principle tax free up to £30,000.00. Typically there will also be a confidentiality clause. There will also possibly be an ongoing non-compete/non-poaching clause, although this is not standard and our solicitor should advise on this.

Can an employee reject a compromise agreement ?

Yes, this is a by consent agreement and so can be rejected. If you choose to reject the offer, you need to consider what your prospects may be of successfully bringing a claim in the Employment Tribunal and what your prospects are for another job. It is not that unusual for an employee offered a compromise agreement to already have another job offer. Rejecting the agreement in those circumstances makes little or no sense generally.

Another factor to consider is that most Tribunal claims take many months, whereas a compromise agreement is generally concluded very quickly, within days and it is standard for the employer to make full payment within 14 to 28 days and the employee is generally not required to work any notice period.

Who pays the employee’s legal fees ?

Because it is a statutory requirement that a compromise agreement will only be valid if the employee receives independent legal advice, it is standard for the employer to pay typically between  £250.00 to £500.00 plus VAT for the employee’s legal costs. If the offer made is acceptable, this budget normally means the employee does not pay any legal fees. If negotiations are required, the employee may end up paying some additional costs for legal time and advice.

How can Waring & Co help ?

We provide a fast, knowledgable and efficient compromise agreement advice service to employees throughout North London, North West London and Hertfordshire. From our offices conveniently located in Barnet, we provide compromise agreement advice to clients in many areas including the boroughs of Barnet, Enfield, Brent and Harrow and in the local areas of Barnet, Finchley, Enfield, Southgate, Edmonton, Palmers Green and Cockfosters. For angent appointment, please contact David Winston, Head of our Employment law team.