What is a Compromise Agreement and why do I need one?

In light of recent announcements by Vince Cable stating that Compromise Agreements are to be renamed as “Settlement Agreements” we thought it would be useful to provide an overview of these agreements, why they might be useful and who can obtain one.

A Compromise Agreement is a legally binding contract between two parties, in this case an employer and an employee. Its’ primary function is to stop an employee from making any statutory or contractual claim in connection with their employment.

This sounds a bit harsh but often these Compromise Agreements are used in situations where employer and employee want to part company without resorting to redundancy, firing or resigning.

The employee normally receives a negotiated financial sum in exchange for waiving their rights to any future claim over the employer.

Compromise Agreements are usually confidential, and contain a clause to this effect, so as to prevent the employee from disclosing details of the financial settlement or any other potentially damaging information relating to their employer or period of employment.

The employer cannot abuse a Compromise Agreement, and employees cannot waive their statutory employment rights. As a general rule of thumb in order for a Compromise Agreement to be binding the following must be true:

(i) The agreement has to be in writing

(ii) The agreement must relate to the particular issue or complaint raised by the employee

(iii) The employee must have received independent legal advice

(iv) The employee’s advisor must have appropriate professional indemnity insurance in place

(v) The employee’s advisor must be detailed in the agreement

(vi) Section 203(3) of the Employment Rights Act 1996 has been satisfied.

Generally accrued pension rights cannot be waived under a Compromise Agreement (as the trustees of the pension fund are not party to the agreement) and care must be taken if the employee’s claim relates to personal injury or discrimination, as there is a risk in these cases of employees challenging Compromise Agreements after the event if they are not drafted correctly.

If the terms of the Compromise Agreement are breached by the employer, the employee could pursue a claim for breach of contract; however the cost of doing so may be higher than what they were due under the original agreement.

Often a Compromise Agreement may include a clause which states that the employee will repay the financial settlement if they themselves breach any terms of the agreement, but these are generally seen as penalty clauses and often unenforceable. They may  however still be used by employers as a deterrent.

Every dispute between an employer and employee is different and unique. If you would like to talk to us about the drafting of a Compromise (or Settlement) Agreement, whether you are the employer or employee, give us a call on 0800 014 8727 or email us for an informal, no-obligation discussion.