Compromise Agreements - What Should They Contain? - By: Tim Bishop

A compromise agreement is made between an employer and employee when the employment contract is to be terminated. The agreement serves the purpose of a settlement between both parties that prevents future legal action for a breach of contract in return for a financial award.

Many compromise agreements are marked 'without prejudice' and 'subject to contract'. As the agreement is normally made Without Prejudice this means that even if you pull out of the settlement, the content of the agreement cannot be used as evidence before the Tribunal. Subject to contract means that the compromise agreement is not valid until both parties have signed a legally binding contract, which will usually provide more detail than the original agreement.

When are compromise agreements used?

A compromise agreement can be offered by an employer that is going to breach an employee's rights by terminating their employment contract. It is normally the situation in which an employer accepts that they may loose at an Employment Tribunal when a compromise agreement is offered. Therefore they can be used in cases of discrimination, unfair dismissal, constructive dismissal and redundancy.

Compromise agreements are being used more and more frequently in redundancy cases. Employers have more responsibilities under the law when making people redundant then ever before. Due to this, employers often end up breaching an employee's rights when making them redundant. The compromise agreement therefore provides a way for the employer to compensate the employee for the breach of their rights and in return they are then unable to bring a claim before the Employment Tribunal.

What does a compromise agreement need to contain in order to be legally binding?

s.203 Employment Rights Act (1996) provides some basic instructions as to what a compromise agreement needs in order to be legally binding. These are as follows:

- It must be in writing.

- It be in connection with the employment contract.

- It should only be agreed by an employee who has sought independent legal advice.

- The independent legal advisor should have professional indemnity insurance to cover any risk that may arise from the claim.

- The agreement should identify the independent advisor and usually the advisor will sign to confirm that legal advice has been given.

The agreement is legally binding once everything has been agreed upon and it is signed by both parties.

What information is provided within a compromise agreement and what financial reward will I receive?

A compromise agreement will usually contain the following information:

- Details of the employment contract such as the position worked, start date, end date, salary etc.

- Details of any outstanding salary or annual leave which needs to be paid (note this will be subject to tax and NI as normal).

- Any arranged garden leave prior to termination.

- Any payments in lieu of notice (under PILON clauses) which are to be made.

- Details of the financial incentive for the agreement.

- Any agreement regarding references.

- Any agreement regarding legal costs.

- Any restrictive covenants regarding confidentiality.

- Anti-poaching, competition or dealing clauses.

- A waiver of your rights to bring a claim on the same grounds upon which the agreement was formed, in the Employment Tribunal.

The amount of money that you will get under the agreement will depend on the nature and seriousness of your claim. A specialist compromise agreement solicitor can advise further on this point.

The first £30,000 awarded under an agreement is tax free. Additional money is also normally awarded for the insertion of clauses relating to confidentiality or competition. Usually the more flexible an employee is, the more the employer awards.

About the Author

Bonallack & Bishop are specialist compromise agreement solicitors. If you need advice on your redundancy compromise agreement contact one of their lawyers today. Tim Bishop is senior partner at the firm, responsible for all major strategic decisions. He has grown the firm by 1000% in 13 years and sees himself as a businessman who owns a law firm.

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