What is a Compromise Agreement?

A Compromise Agreement is a contract between an employer and employer and is usually used for the purposes of paying an employee a sum of money (a compensation payment) in return for waiver of their rights to bring certain claims against the employer before an Employment Tribunal. The Agreement should be tailored to each individual’s circumstances otherwise it may not be effective.

At Eric Robinson, we have seen an increase this year in both preparing Compromise Agreements for employers and also advising employees on the terms and effect of the Agreement. Compromise Agreements are often used in redundancy situations and particularly, when an employee applies for voluntary redundancy. A Compromise Agreement can also be a clean break between an employee and employer and with prohibitive costs of bringing or defending an Employment Tribunal claim. It is often a cost effective, sensible and amicable solution to resolving sometimes difficult situations at work.

Traditionally, nearing the end of a calendar year and the end of the tax year tends to be a busy time for employment lawyers advising on Compromise Agreements.

For the Compromise Agreement to become legally binding, the employee must receive independent legal advice on the terms and effect of the Agreement and on his ability to pursue their rights before an Employment Tribunal. Once the employee has received legal advice and both parties have signed the Agreement, it then becomes a fully binding contract between the parties.

Who is qualified as a “Legal Adviser”

Advice must be sought from an independent legal advisor. An adviser includes:

• A solicitor who holds a current Practising Certificate;

The legal adviser must be covered by a contract of insurance or an indemnity provided for members of a profession or professional body covering the risk of a claim by the employee in respect of any loss arising as a result of his advice. An Adviser’s Certificate is annexed to the Compromise Agreement to demonstrate that the relevant adviser is insured or indemnified to give such advice. It is usual for the employer to pay a contribution or all of the employees’ costs,

The terms of a Compromise Agreement

In obtaining this legal advice, which usually ranges between £250.00 to £500.00 plus VAT, is dependent on the complexity of the situation, seniority of the employee and effectiveness of the terms of the Agreement which may require additional time to advise.

The terms of a Compromise Agreement usually consists of the following clauses, however, this is not an exhaustive list of clauses to be utilised in Compromise Agreements.

Waiver of all rights

It is important, from the employer’s prospective, that the Agreement specifies all possible claims which the parties wish to settle and should, therefore, be carefully drafted to ensure that any potential claims are also covered in the waiver of the employee’s rights.

Compensation payment

The starting point of any Compromise Agreement is the compensation payment. Employers usually take into account any likely award that the employee may receive if they pursued a claim at an Employment Tribunal, balance this with the risk and cost involved in bringing a claim and reach a sum agreeable to both parties.

Tax liabilities

With respect to tax liabilities on compensation payments received under a Compromise Agreement, employees would usually have to pay tax and national insurance contributions on any payment for wages, notice pay and holiday pay.

A compensation payment for loss of employment however is paid tax-free up to the first £30,000.00 of the compensation.

A tax indemnity clause is usually inserted into the Agreement, so that if it is found by the HM Revenue and Customs that tax is due, the employer can seek to recover this from the employee. It is important for the employee that if this type of clause is present, that there is a right to challenge HM Revenue & Customs before any payment is made.

Benefits

The termination of employment may have an impact on benefits provided to the employee during the course of his employment such as a pension scheme, company car and bonuses. The Compromise Agreement should cover what will happen to the benefits upon termination of employment.

References

A Compromise Agreement can include a reference for the employee to be annexed to the Agreement for future employers.

Company property

As part of the Compromise Agreement, it may have been agreed that the employee can retain certain company property until the termination of his employment or afford for the employee to return such company property before the termination date.

Restrictive covenants