Compromise Agreements are a standard way of formally ending an employment relationship or settling a tribunal claim.
A compromise agreement is a legally binding contract between employer and employee and will contain standard clauses governing the termination of employment and the obligations of both parties. A compromise agreement will normally prevent the employee bringing any legal action against their employer. All compromise agreements will vary but what follows is a description of some common clauses:
Compensation
Typically the employer will offer a “termination” or “ex gratia” payment to compensate the employee for losing their job and to incentivise them to enter into the compromise agreement. The ex gratia payment could be an enhanced redundancy payment, or simply compensation for loss of office. Any payment of up to £30,000 will normally be tax free although specific rules apply to payment in lieu of notice and other non-salary related payments and advice should be taken.
Tax indemnity
It is standard for the employer to require the employee to enter into a tax indemnity clause; this means that the employee will be responsible for any tax that may be charged to the termination payment, over and above any tax deducted at source. It may be possible to negotiate on the wording of the tax indemnity clause.
Full and Final Settlement
The compromise agreement will require the employee to “compromise” or forgo their employment rights; the employer will make the termination payment in exchange for the guarantee that the employee will not bring any legal action against the company. The employee is not usually prevented from bringing legal action for certain personal injury or pension rights.
Legal advice
In order to be a legally binding compromise agreement, the employee must receive independent legal advice. The employee can receive legal advice from a solicitor or barrister, or a qualified trade union representative. It is common practice for the employer to make a contribution to the advisor’s fees.
Confidentiality
Often there will be confidentiality provisions, requiring that the fact and contents of the compromise agreement is kept confidential. The employer may also require a guarantee from the employee that they maintain confidentiality of company information.
Non-derogatory comments
This type of clause will restrict the employee from publicly making derogatory or disparaging comments about the employer. It may be appropriate for such a clause to be mutual.
Company Property
The employer will expect that any company property is returned upon termination of employment. Company property can be anything from IT equipment to paperwork.
Reference
The employer will normally give a factual reference and the wording of the reference is usually incorporated into the compromise agreement. The standard position is that the employer will provide dates of employment and job title although an employee may be able to negotiate a fuller reference.
Without prejudice
The compromise agreement will normally be offered on a “without prejudice” basis, which means that the compromise agreement cannot be shown to a judge or court in the event that it is not accepted by the employee. This protection is lost once the agreement is signed by all parties.
A compromise agreement is a useful tool to provide clarity and certainty to both parties. A compromise agreement may be used at any point during employment or after employment has terminated. They are regularly used in advance of redundancy consultation, or where there is a potential dispute between the parties for example where a grievance has been raised or where there has been a breakdown in the working relationship. A compromise agreement can also be used at any stage in tribunal proceedings in order to formally record settlement and to conclude the tribunal process.
Bevans regularly advise both employers and employees on compromise agreements. For further advice concerning compromise agreements please contact Guy Hollebon or Harriet Broughton on 0117 923 7249.