Compromise Agreements FAQ
What is a compromise agreement?
A compromise agreement is an agreement entered into by an employer and employee. Essentially, the employee signs away their right to bring particular employment claims, such as unfair dismissal, against the employer in the future.
Does an employer have to enter into a compromise agreement where they decide to terminate the employment relationship?
No, but in some circumstances it is advisable as it may be a useful and cost effective solution for an employer who suspects that an employee may have a claim against them. It provides the security of knowing that the employee has given up his or her right to bring an employment related claim in the future.
What does the employee receive in return for signing a compromise agreement?
The employee will usually receive a lump sum settlement payment which they would not be entitled to under contract or statute. This payment is in effect compensation for the employment relationship being terminated with the guarantee that the employee will not bring legal proceedings against the employer.
Does an employee have to be advised on the terms of the compromise agreement?
Yes. One of the legal requirements for a valid compromise agreement is that the employee must be advised on the terms and effect of the compromise agreement. The adviser will sign a certificate stating that the employee has been independently advised.
Who can advise an employee on the terms of the compromise agreement?
The employee must have received independent legal advice from an independent legal adviser who is not acting for the employer or an associated employer.
A relevant independent adviser is defined as follows:-
- a qualified lawyer, including a certified legal executive;
- a certified and authorised officer, official, employee or member of an independent trade union; or
- a certified and authorised worker at an advice centre who is not paid for providing advice to the employee.
Our experienced employment law solicitors will ensure you have the right employment advice and support to guide you through this process.
Are there any other requirements that must be met when entering into a compromise agreement?
Yes. In order for the agreement to be legally binding and enforceable the agreement must also be in writing and relate to the particular complaint or complaints listed in the agreement. In addition to the employee having to receive independent legal advice, the legal adviser must also be clearly identified in the agreement and the agreement must state that all of these conditions have been satisfied.
Who pays for the cost of the legal advice the employee receives?
There is no set rule establishing who should pay for the legal advice the employee receives. However, it is common practice for the employer to contribute towards the employee's legal fees. It is up to the employer how much they contribute.
What is the tax position with regard to payments made to the employee under the compromise agreement?
Where the payment is an ex-gratia payment compensating the employee for loss of employment, the first £30,000 will generally not be subject to tax. Any contractual payments should be taxed in the usual way, including contractual payments in lieu of notice.
Can an employer ensure the confidentiality of the terms of the compromise agreement?
An employer can insert a confidentiality clause in the compromise agreement. This will usually state that the employee agrees to keep confidential the existence or terms of the agreement and will not disclose those terms to any person save the employee’s professional advisers, the relevant tax authorities and government departments and as otherwise required by law. This obligation can also be reciprocal, with the employer being placed under a similar obligation. In addition, it could be further provided that no derogatory or negative remarks would be made by either party in relation to the other.
Does an employer have to provide a reference for the employee?
No. However, an agreed reference is often negotiated as part of the terms of settlement. This would usually be contained in an appendix to the agreement and would be sent out to prospective employers on request.
What if the employee breaches the terms of the compromise agreement?
If either party breaches the terms of the compromise agreement, they will have the same remedies available to them as they would have for any breach of contract and will be able to sue for damages if they suffer loss as a result of the other party’s breach. Depending on the circumstances, if the employee breaches the agreement, they may require to repay any money they have been paid in terms of the agreement.
Are there any alternative ways an employee can waive their right to raise an employment related claim?
The employer and employee could enter into a COT3 agreement using the services of ACAS. This records the terms of a settlement reached between an employer and employee, usually where tribunal proceedings have already commenced.
See also Compromise Agreement Factsheet
Contact Us
You can contact the employment law team in Edinburgh, Glasgow or London. For an initial informal discussion contact Innes Clark:
T: 0131 247 1181
E: innes.clark@morton-fraser.com
The contents of this article are for information only and are not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser accepts no responsibility for the content of any third party website to which this article refers.
