Veitch Penny LLP - Exeter | Crediton, Devon

What is a compromise agreement?
A compromise agreement is a legally-binding agreement often agreed between an employee and an employer when the parties wish to reach an amicable settlement of their dispute.  The agreement sets out the terms of the settlement (normally financial) in return for an employee compromising his or her potential claims at an Employment Tribunal or at Court.

My employer has asked me to sign a compromise agreement
The purpose of a compromise agreement is to allow the parties to settle a dispute and would normally take place between an employer and employee.  An employer may be making a proposal to compensate the employee as a result of what has taken place in return for the employee giving up his or her rights to take a claim at the Employment Tribunal or at Court.

There are a number of conditions which must take place for a compromise agreement to be binding.  One of those is that an employee is advised by an independent solicitor as to the contents of the agreement and its effects.  In most cases, the employer will pay a contribution towards the employee’s legal fees incurred in receiving the legal advice on the agreement.  In most instances, this contribution will be sufficient to cover an employee’s legal fees for receiving this advice.  In some instances, a further fee may be required from an employee if we provide additional services such as negotiating an increased termination package.  We will in all instances discuss this additional work with an employee and give an estimate of fees before proceeding. 

A settlement package has been proposed.  What does it mean for me?

Signing a compromise agreement means that in return for accepting the settlement package you will refrain from bringing a claim at the Employment Tribunal or in Court.  Part of our advice will be to ensure that you receive all the payments which may be owing to you.

Are there any claims I can bring?

This will depend on the terms of the compromise agreement itself.  However, you will usually still be able to make a claim against your employer in the event the employer should breach the agreement, for example by failing to pay the sums due to you.  You will usually be able to bring claims of personal injury.  Some agreements exclude claims for personal injury, save those claims relating to personal injury of which you are unaware at the time the agreement is signed.  It is also normally possible for you to continue to make a claim in respect of accrued pension rights. 

What about tax?

You will have to pay tax and national insurance on any outstanding wages, holiday pay and other payments due to you under your contract of employment.  You will probably have to pay tax if a payment is made to you in lieu of notice, but in some cases it can be paid tax free.  Settlement payments of up to £30,000 are usually tax-free.  It may be possible to agree other settlement terms such as purchase of a company car or use of a lap-top.

The agreement would also normally say that if a payment is made to you tax-free but that H M Revenue & Customs later decide that the payment should be taxed then you will be responsible for settling this outstanding tax.


What other clauses might the agreement contain?

Most employers will want a confidentiality clause to be included that you will keep the terms of the settlement confidential or even the fact that you have entered into the agreement itself confidential. 

Sometimes an employer will also want the agreement to contain a clause confirming the employee won’t make any disparaging comments about the employer.

What about a reference?

Employers are not obliged to provide a reference, but where they choose to do so it should be true and accurate.  It may sometimes be permissible to incorporate the wording of a reference into an agreement.

What should I do next?

If you have been given a compromise agreement by an employer, then you need to take legal advice promptly as most employers are keen to compromise a claim speedily and may have given a deadline by which to complete the agreement.  In the event you do not agree to sign the compromise agreement, then you would generally have three months from the date of termination or act of discrimination within which to make a claim.

Rachel Billen – Associate Solicitor, Employment Department at Veitch Penny.
Tel: 01392 278381, Fax: 01392 410247, Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

This Employment Law Article does not constitute legal or other professional advice and should not be relied on as such.  You should take specific advice regarding your circumstances before taking any action based on the information contained within this Article.