1. What is a Compromise Agreement?

A Compromise Agreement is a legally binding document that records an employee’s agreement not to pursue an employment related claim or claims against his/her employer, such as unfair dismissal, discrimination or breach of contract. In consideration for the employee agreeing to this, the Compromise Agreement will usually provide for a severance payment (i.e. a cash lump sum) made by the employer to the employee in addition to what the employee is contractually entitled to in any event (e.g. wages and benefits up to the termination date, notice and accrued but untaken holiday pay).

Employers are now increasingly using Compromise Agreements as a mechanism for preventing possible future complaints to an Employment Tribunal.

2. What does “Without Prejudice and Subject to Contract” mean?

Compromise Agreements are usually marked on the front page, “Without Prejudice and Subject to Contract”. The effect of this is as follows:-

• By being marked Without Prejudice it means that the Compromise Agreement cannot be used as evidence in Court or Employment Tribunal proceedings.
• By being marked Subject to Contract it means that the Compromise Agreement will not be binding on the parties until it is signed by the employee and the employer. There is normally a clause towards the end of the Compromise Agreement which states that the agreement is without prejudice and subject to contract and will only become open and binding once signed by all parties. As such, until it is properly signed, neither party is bound by any of the obligations contained in the Compromise Agreement.

3. What conditions have to be met to make the Compromise Agreement legally binding and enforceable?

For a Compromise Agreement to be legally binding and hence enforceable the following conditions must be satisfied:-

• The agreement must be in writing
• The agreement must relate to the particular complaint raised by the employee
• The employee must have received advice from a relevant independent adviser, such as a solicitor, as to the terms and effect of the proposed agreement and in particular, its effect on his or her ability to pursue his/her rights before an Employment Tribunal. Normally, the adviser signs to confirm the advice has been given.
• The adviser must be covered by professional indemnity insurance in respect of the advice given.
• The adviser must be identified in the Compromise Agreement.
• The agreement must state that the conditions regulating Compromise Agreements have been satisfied.

Your solicitor should ensure that all of these conditions are satisfied so that the Compromise Agreement is indeed legally binding and enforceable.

4. Is a good deal being offered?

There is no generic answer to this question as each Compromise Agreement needs to be carefully considered on a case by case basis. However, in considering whether what is being offered under the Compromise Agreement is a good deal and hence should be entered into (as opposed to not entering into it and instead bringing a claim or claims in the Employment Tribunal) the following are examples of factors which may be taken into account:-

• What claims do you have which are intended to be compromised and what is the likelihood of succeeding in an Employment Tribunal based on those claims?
• How much money are you being offered as a cash lump sum in addition to what you would be entitled to in any event (e.g. in addition to salary, benefits, notice and holiday pay)?
• The likely amount of money an Employment Tribunal will award you if successful.
• The legal costs of taking the matter to an Employment Tribunal as opposed to entering into a Compromise Agreement (for further information, see our guidance on funding options for employees.

Although the question of whether a good deal is being offered is normally the most important consideration for any Employee, the case law is such that the independent advice given by the adviser for the purposes of a valid compromise need not include advice on whether the proposed settlement is a “good deal” for you.

In other words, if you do not ask your adviser if you are getting a good deal, then there is no obligation on the adviser to volunteer their legal opinion on this point. However, as this is ordinarily the most important question, it would be highly advisable that you do ask your adviser this very question. Moreover, given the importance of this advice, you should be satisfied that you will receive full and proper advice. The best way to ensure this is to seek advice from an adviser, such as a solicitor, who is a specialist in employment law.

5. What are the tax implications?

The basic position is that all contractual entitlements such as salary and benefits paid up to the termination date and accrued but untaken holiday are subject to Tax and National Insurance in the normal way. However, the first £30,000 of the cash lump sum being offered in addition to these payments is free of Tax and NI.

As such, the Compromise Agreement should clearly separate out the salary and benefits which are taxable from the cash lump sum payment of which the first £30,000 is not to be taxed.

Special rules apply in the case of payments in lieu of notice.

Finally, if the Compromise Agreement contains a new restrictive covenant (e.g. not to solicit the business of any customers of the employer for a period of 6 months following termination of the employee’s employment) then there should be a separate and identifiable payment in respect of this which would be taxable. If there is such a covenant included in the Compromise Agreement but no separate payment in respect of it identified in the Compromise Agreement, HMRC may seek to claim that some or all of the cash lump sum being paid free of tax by the employer is in fact in consideration for entering into the new covenant and thus seek to tax it.

There will normally be a tax indemnity in the Compromise Agreement whereby you agree to indemnify the employer against any tax and National Insurance arising on the cash lump sum (being paid free of tax) should HMRC subsequently seek to tax it. It is for this reason that it is important that the above tax issues are recognised and dealt with appropriately in the Compromise Agreement.

6. What rights are being given up?

A Compromise Agreement must set out clearly those employment claims that you are giving up. As such, a total blanket full and final settlement of all possible claims will be ineffective. This means that normally the Compromise Agreement will list individually each of those claims which the Employer wants you to give up (e.g. unfair dismissal, breach of contract, unauthorised deductions from wages).  The list can be quite exhaustive as the Employer will want to cover as many specific claims as possible. Your adviser should nevertheless go through each of the claims with you in order that you fully understand the rights you are giving up.

The Compromise Agreement should not however seek to compromise any claim for accrued pension rights or any personal injury claim of which you are unaware or ought not reasonably be aware. To do otherwise, would be void. You can however compromise a personal injury claim of which you are aware or ought to be reasonably aware and more often than not the Compromise Agreement will seek to do this.

7. What to do once a Compromise Agreement has been offered?

You should source a relevant independent adviser, such as a solicitor, suitably qualified to advise on the terms and effect of the Compromise Agreement, preferably someone who specialises in employment law. You should then contact the solicitor to find out the cost for advising you on the Compromise Agreement and, if satisfied with the cost, book an appointment to meet the solicitor. In terms of the solicitor’s costs, there will usually be a contribution payable under the Compromise Agreement towards the solicitor’s costs. Solicitor’s costs do vary so you should satisfy yourself that the cost is reasonable and competitive.

You should take the Compromise Agreement and any other relevant documentation (e.g. contract of employment, grievance or disciplinary letters etc) to your meeting with the solicitor.  At the meeting itself, it is advisable to:

• Ask as many questions as necessary in order for you to be able to fully understand the Compromise Agreement and be comfortable with it before signing;
• Ask if what is being offered is a good deal for you. If it is not a good deal ask what would be and what steps can be taken to negotiate a better deal for you and the cost/benefit of doing so.

Once the Compromise Agreement is in order and signed by you, the solicitor will normally sign the Agreement either directly in the Agreement or by completing an Adviser’s Certificate annexed to the Compromise Agreement. The solicitor will then send this to the employer.

Upon receipt of the Compromise Agreement by the employer, it should be signed for and on behalf of the employer at which point the Compromise Agreement becomes open and binding. Until it is signed by the employer it is not a binding agreement. As such, your solicitor should ensure that it is signed preferably upon receipt or failing that within a reasonable period of time after receipt. Your solicitor will also normally ask for a copy of the Agreement to be returned for his/her and the employees’ records. Following that, it is up to the Employer to process all the payments due within the time limits stipulated in the Compromise Agreement.

Hopefully this guide will have given you a better understanding of how to get what is best for you. It is important that you get proper legal advice as it is easy to be ‘railroaded’ by clever employers into accepting less than you are due.

Make sure you invest in an advisor who will answer all your questions, ensure you understand and give you the best advice for you and your outcomes.