What Is A Compromise Agreement?
The aim of this page is to give you a general overview on compromise agreements. However if you have been given a compromise agreement you will need specific advice on it. Please contact us if you require specific independent legal advice from a solicitor on your compromise agreement.
The law behind compromise agreements
Compromise agreements were created by section 203 of the Employment Tribunals Act 1996.
A compromise agreement is a legally binding agreement between an employer and employee. The purpose is to stop the employee from instigating or continuing Employment Tribunal proceedings in return for money thus creating a clean break between the employer and employee. By signing the agreement the employee usually waives their right to sue the employer. The compromise agreement must comply with the requirements of section 203 of the Employment Tribunals Act 1996. These requirements are as follows:
- The compromise agreement needs to be in writing.
- It needs to relate to particular proceedings.
- The employee has to have received advice from a relevant independent advisor (such as a solicitor) as to the terms and effect of the proposed agreement and in particular the effect on the employees’ ability to pursue their rights before an employment tribunal.
- The independent advisor needs to have a contract of insurance or indemnity in force.
- The compromise agreement must identify the independent advisor.
- The compromise agreement must state that the conditions regulating compromise agreements under the Employment Tribunals Act 1996 have been satisfied.
Common terms contained within the compromise agreement
‘Without prejudice’ and ‘subject to contract’
The vast majority of compromise agreements are marked ‘without prejudice’ and ‘subject to contract.’ A ‘without prejudice’ document is one which cannot usually be used in evidence in proceedings. ‘Subject to contract’ means that the document is not binding until it has been properly signed by all parties.
The use of these phrases within the compromise agreement indicates that there is a genuine attempt to agree terms between the parties and that neither party is under any obligation until all matters have been completed properly.
When the compromise agreement has been properly completed it becomes open and binding.
Breakdown of payment received
There is usually a breakdown of the payment the employee is receiving within the compromise agreement. The payment is broken down as payment in lieu of notice, redundancy payment, ex gratia (compensation payment) and any bonus entitlements.
Taxation & employer’s indemnity
Usually the first £30,000 of any compensation (or ex gratia) payment is tax free (Income Tax (Earnings and Pensions) Act 2003). However the employer usually asks for an indemnity to the employee regarding the tax position. The indemnity is nearly always contained within a compromise agreement.
Pensions & other entitlements
It is common for a clause to contain reference to the employee’s pension and other entitlements such as medical care, share options and gym membership.
Warranty
It is common for the employee to warrant that they have not failed to disclose any material facts that concern their employment or notified the employer of all complaints arising out of their employment or not issued any claim against the company or have not disclosed the contents of the compromise agreement to any person whatsoever.
Waiver of existing or future claims & list of employment law legislation
The main reason an employer would want to enter into a compromise agreement would be to make the employee give up their rights with regards to bringing any claim against them. The employer wants full and final settlement with the employee.
It is usual for the compromise agreement to incorporate the various employment law acts (e.g. Employment Rights Act, Sex Discrimination Act) under which the employee agrees not to bring any claim against the employer. In order for the employer to be able to enforce the agreement they may need to list all the statutes as the agreement is intended to be in full and final settlement of all claims.
By signing the compromise agreement the employee is signing away their rights to sue the employer in the future.
Restrictive covenants and confidentiality clauses
The compromise agreement may also contain clauses regarding restrictive covenants. These could confirm existing covenants under the employment contract and new ones relevant to the post termination of employment. These may include clauses dealing with poaching employees, soliciting or dealing with the employer’s customers.
Confidentiality clauses are quite usual, including those in which the employee is paid a small sum of money not to reveal confidential information and not to make derogatory remarks against the employer or any other group company. This may be a mutual obligation, meaning that the employer agrees not to do the same to the employee.
Repayment on breach
The employer will usually include a clause in which the employee has to pay back the settlement if they breach the terms of the compromise agreement.
Return of property
It is usual for there to be a clause asking that the employee return all property including keys, passes, handbooks, computers, mobile telephones to the employer.
Legal advice
As it is a legal obligation to get legal advice from an independent advisor there is usually a clause confirming that this has actually happened and who the legal advisor is and which firm they are from.
Legal expenses (fees)
There is no entitlement for an employer to pay legal expenses but since one of the requirements for a valid compromise agreement is legal advice, it is customary for the employer to offer legal expenses. We do not usually charge more than your employer is offering.
Jurisdiction
Employers usually state that they wish the agreement to be exclusively under the jurisdiction of the law of England and Wales.
References
There is usually a standard reference annexed to the compromise agreement.
Legal certificate
It is good practice for a certificate signed by the employee’s legal advisor to be annexed to the compromise agreement.
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