A Simple Guide to UK Compromise Agreements - By: Tim Bishop

What is a UK compromise agreement?

A UK compromise agreement is a formal contract created between an employer and employee in settlement for termination of their employment.

The agreement is a 'compromise' of terms between the employer and employee. It will normally include a compensatory payment and a list of termination clauses. These provisions make sure that the agreement is final and therefore no future legal proceedings can be brought, such as the employee looking for more compensation at a later date.

Why would I seek a compromise agreement?

Your employer has to abide with employment law which, means that they cannot merely 'contract out' from providing employee rights. In light of this, a compromise agreement provides a solution to ending an employment relationship amicably.

After a compromise agreement is signed, a claim cannot be brought before an employment tribunal by the employee. Due to the importance of such an arrangement, it is always advisable to seek professional legal advice before entering into such a contract. A solicitor expert in negotiation skills will make sure that any settlement amount offered is reasonable and fair according to your circumstances.

Who pays for a compromise agreement?

Usually an employer will cover the costs of creating a compromise agreement. Your Solicitor will normally invoice the employer direct for the costs of drawing up such an agreement (costs usually estimate around £250 - £300 depending on the complexity of the agreement).

It is however, your responsibility to ensure that the employer pays these costs and there is the possibility that extra work need be carried out which, will then be charged to you.

Are the provisions included within the compromise agreement confidential?

The level of confidentiality varies from contract to contract. Some compromise agreements will include a clause that requires the employee not to discuss it's contents with other employees. However, some will contain vast provisions preventing either party from discussing the contract with outside parties. An employer will sometimes request that neither party admits to the existence of the compromise agreement.

Clauses that prevent both parties from making degrading comments about the other are often included in compromise agreements.

What happens if I do not want to consent to the proposed agreement?

An employee is under no legal obligation to sign a compromise agreement. If you decide not to sign the agreement then you can start proceedings against your employer at an employment tribunal. However, bear in mind that a compromise agreement may carry more favourable terms then say a redundancy or tribunal pay-out.

An experienced solicitor will be able to negotiate the terms of the agreement on your behalf. They will make sure that the settlement amount offered by your employer is just and reasonable in the circumstances.

Do I have to pay tax and national insurance on compensation that I receive under a compromise agreement?

An employee is entitled to receive a payment up to £30,000 which is tax and national insurance free. However, if the compensation money contains outstanding wages and holiday pay, then tax and national insurance will be payable on this proportion.

If the agreement contains a PILON (payment in lieu of notice) clause, then HMRC will class this as a payment of salary and it will be subject to tax and national insurance as normal.

The employer will commonly request that a tax indemnity clause is inserted into the agreement. This means that in the event that any tax and national insurance is payable, then is becomes the employee's responsibility to settle this payment with HMRC. In any event, to make sure your UK compromise agreement is binding, you need to take independent legal advice on it - make sure you do so from employment law solicitors who specialise in compromise agreements.

About the Author

Tim Bishop is senior partner at Bonallack & Bishop, a firm of specialist compromise agreement solicitors specialising in advising on UK compromise agreements. He is responsible for all major strategic decisions, seeing himself as a businessman who owns a law firm. Tim has expanded the firm by 1000% in 12 years and has plans for its continued development.

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