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Compromise Agreements

A breakdown in the relationship between employer and employee need not always result in Employment Tribunal proceedings.   Provided certain formalities are complied with a Compromise Agreement may allow an employer and employee involved in a dispute to settle their differences without the expense of and uncertainty of litigation.   An employer considering disciplinary proceedings but concerned as to the outcome or the effect on employee moral generally may prefer to offer the employee a compensation package as a speedy, certain and efficient way of resolving any dispute.   In order to ensure finality an employer, in such circumstances, should have the employee sign a Compromise Agreement.    Such an agreement can be used to settle any type of employment claim and if appropriately drafted and signed by the employee will prevent him/her from pursuing any  future tribunal claim that it is stated to compromise.

The benefits of a Compromise Agreement

For the employer

  • certainty as opposed to the risk of defending a claim;
  • a saving in management time;
  • an avoidance of adverse publicity both internally and externally by the incorporation of a confidentiality provision into the agreement;
  • minimising the involvement of other employees in any dispute which can adversely affect morale, loyalty and commitment;
  • reduction of legal costs.

For the employee

  • certainty as opposed to the risk and stress of pursuing a potential claim.
  • probably an acceleration of receipt of the payments due under the agreement.
  • ability to agree a reference and annex to the agreement.
  • possible tax advantages.

Conditions regulating Compromise Agreements

In order to be legally effective a compromise agreement :-

  • must be in writing
  • must relate to the particular proceedings (e.g. unfair dismissal or redundancy)
  • must provide the employee with advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, its effect on his or her ability to pursue his or her rights before an employment tribunal.
  • must identify the relevant independent adviser
  • the adviser must have in force a contract of insurance or an indemnity provided for members of a professional body covering the risk of a claim by the employee
  • must state that the conditions regulating compromise agreements have been satisfied.

A "relevant independent adviser" includes a solicitor.

Additional terms that a Compromise Agreement might include

The primary purpose of most compromise agreements will be for the employer to offer the employee a severance package in return for which the employee will agree not to pursue future tribunal or court proceedings arising out of the employment relationship and its termination.    It is possible, however, to also tie up other loose ends including :-

  • a restatement of any restrictive covenants or confidentiality obligations contained in the contract of employment that an employer wishes to continue to bind the employee after its termination.  
  • the provision of any agreed reference
  • a mutual acknowledgement of confidentiality in respect of the severance package and the other terms contained within the agreement
  • a tax indemnity for the employer in respect of any payments made gross to the employee as part of the severance package.
  • a specific exclusion of certain claims from the "full and final settlement" aspect of the agreement e.g. accrued pension rights and often certain personal injury claims.

Factors to consider in settlement negotiations that may lead to a Compromise Agreement

It is important to ensure that the settlement negotiation process is conducted "without prejudice".  Where a dispute exists between employer and employee any written or verbal contact between them that consists of a genuine effort to resolve their differences will not usually be admitted in evidence at any subsequent tribunal or court hearing if the negotiations have been stated to have been conducted "without prejudice".     The purpose of the principle is to allow parties to negotiate and settle their dispute without formal litigation in the knowledge that anything that is said or written in the course of those negotiations will not be used in any future proceedings against them if the negotiations fail. 

It is important to understand that the "without prejudice" principle applies only in circumstances where there is a dispute between employer and employee and efforts  are being made to resolve that dispute.    Documentation and discussions taking place within disciplinary and grievance procedures will not be protected by the principle and it is essential that any formal disciplinary or grievance procedures are conducted separately from without prejudice negotiations.   

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