Compromise Agreements - What Should They Contain?

Compromise agreements are useful tools for employers and employees. They act as a settlement agreement in the event of a termination of the employment contract. The agreement prevents future legal action on the grounds of breach of contract in return for a financial settlement.

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. A compromise agreement is consequently used by the employer to compensate the employee for this breach and to prevent them from making a claim against them at 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 should relate to an 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.

If all of these things are followed and the document is signed by both parties then the compromise agreement will be legally binding.

What kind of details does a compromise agreement contain and how much money 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 PILON (payments in lieu of notice) 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 £the first 30,000 given under the agreement is tax exempt. 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.