A compromise agreement is a document that records an employee’s agreement not to pursue an employment related claim (e.g. unfair dismissal) usually in return for a sum of money.

In order for a compromise agreement to be valid:

  • The agreement must be in writing.
  • The agreement must relate to a particular complaint raised by the employee.
  • The employee must have received legal advice from a relevant independent adviser, such as a solicitor, on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.
  • The adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by the employee in respect of the advice.
  • The agreement must identify the adviser – usually the adviser signs to confirm that the advice has been given.
  • The agreement must state that the conditions regulating compromise agreements have been satisfied.

If all of these elements are in place, the compromise agreement will be binding upon the parties and the employee will lose his right to sue for compensation for any breach of his statutory rights.

Employers usually contribute towards the employee’s legal costs in taking advice as to the terms, effect and scope of the agreement. Employers generally agree to pay between £250-£350 plus VAT towards the employee’s legal expenses. If the agreement is straightforward, this sum will generally cover the employee’s costs. If, however, the employee requires in-depth advice as to the terms of the agreement and/or there are protracted negotiations before the agreement is signed off, the employee might incur legal costs over and above the employer’s contribution. Occasionally there is an agreement to increase the level of contribution. Employers will only pay towards an employee’s legal fees if the agreement is signed off. As such, if the employee decides not to sign the agreement after all, the employee may still be liable for his legal costs.

The Government is planning to simplify the process by introducing a standard agreement (called a “settlement agreement”). There is some debate as to whether this will reduce costs to employers and employees as agreements often have to be tailored to individual circumstances. Common issues of dispute/negotiation include:

  • Notice Periods and ‘Pay in Lieu of Notice’.
  • Bonus Payments
  • Share Options/Other Incentive Plans.
  • The Termination Payment.
  • Accrued (but untaken) Holiday Pay.
  • Tax Efficiencies, Tax Liability and Payment Structures.
  • Continuation of Benefits.
  • Directors’ Indemnity Cover.
  • Restrictive Covenants.
  • Confidentiality.
  • References.
  • Garden Leave.

Most compromise agreements are marked ‘Without Prejudice and Subject to Contract’. This means that it cannot be used in evidence in a tribunal or court and that it will not be binding upon the parties until it is signed.