This factsheet explains how a Compromise Agreement works and what happens when you are offered one by your employer.
What is a Compromise Agreement?
A Compromise Agreement is a legally binding agreement between you and your employer. This usually provides for a severance payment by the employer in return for your agreement not to pursue any claims in a tribunal or a court. The employer will usually require you to keep the terms, for example the amount and the surrounding circumstances of your contract’s termination, confidential.
Why do I need a solicitor?
An agreement whereby you waive your rights to bring an employment claim can only be recognised in law if a solicitor or certified trade union or adviser signs it off.
A specialist employment solicitor will advise you on the merits of your claim and the amount of money you would be likely to receive at an Employment Tribunal.
A specialist employment law solicitor will also identify any discrimination against you of which you might not be aware. For example, you might be protected by the Disability Discrimination Act and therefore entitled to reasonable adjustments before any dismissal can take place. In these cases, there will not only be an unfair dismissal claim, but also an amount awarded for injury to feelings.
Why do employers use Compromise Agreements?
Employers will offer a Compromise Agreement when they want to terminate a contract on terms mutually agreed with you. This is so that there is a clean break with no opportunity for you to take them to court or a tribunal for more money.
There is a range of scenarios in which Compromise Agreements are used. They usually apply where the employer does not want to follow what could be a long, drawn-out process, such as a performance review or a full redundancy process, before being able to terminate. Also, where you already have issues about discrimination or have raised a grievance, the employer may want to circumvent a claim for constructive dismissal and /or discrimination.
Do I have to accept termination in this way and on the terms offered?
You can turn down a Compromise Agreement on the basis that this is not the way you wish to deal with the termination of your contract. You can also turn it down if the money offered is insufficient.
Where you are told to sign the Compromise Agreement “or else”, this can be used to illustrate that a later dismissal is unfair or that this treatment was part of a series of acts of discrimination. This is the case even where threats are made “off the record” or “without prejudice”.
What are the usual payments?
Compensation for loss of office
The Compromise Agreement will state the full breakdown of payments due to you and also whether any sums will be paid free of tax. A payment of up to £30,000 compensation can be paid without tax being deducted if it is an ex-gratia payment (compensatory rather than contractual payment).
Notice payment
The Compromise Agreement will deal with your notice payment if this is not going to be worked. If you have no contract or your contract does not contain a provision that refers to your employer being able to make a payment in lieu of notice (PILON), then your employer could pay your notice as a gross amount. There is no additional cost to your employer as this money would otherwise have been paid to HM Revenue and Customs.
It is important that your solicitor checks your contract to make sure you receive the maximum sum in the most tax efficient way possible. Also, as it is usual for you to provide your employer with a tax indemnity in the Compromise Agreement, you need to be advised as to what tax you should expect to pay if the taxman challenges the payments made under this agreement.
Bonus and commission
If you are due bonuses or commission then the amounts owed should be set out in the agreement. A solicitor should check your contract to ensure all contractual bonuses and commission are paid in full.
Pension
Your solicitor will need to advise you in relation to ongoing loss of pension, particularly if you have a final salary pension. Pension contributions should continue during your notice period unless your contract says otherwise. If an arrangement is reached with your employer for a lump sum to be paid into your pension as part of the settlement terms then you may be able to benefit from this being paid free of tax.
Medical and life insurance
Some schemes will allow you to remain in them for the period which your employer has paid up to. Other schemes will require this benefit to terminate on the last day of employment. However, it is always a good idea to find out if the insurer will offer enhanced terms if you stay in the scheme as an individual once your contract has terminated, if there is no break. This can be explored prior to the termination date.
Is the amount of money offered by your employer fair?
Your solicitor should look at the different sums offered to you in your Compromise Agreement and advise you if it is a good deal. This will be based on the facts relating to the employer’s wish to terminate your contract. Your solicitor should provide you with advice as to whether you have a strong claim were you to take your case to tribunal or a court and calculate what you would get if you were to pursue your claims in a tribunal compared to what you are being offered in the Compromise Agreement.
Where the amounts offered are satisfactory, or where you instruct the solicitor to proceed despite the fact you could obtain more in a tribunal or court, your solicitor will sign off the Compromise Agreement to ensure a speedy settlement of the sums offered.
If your solicitor advises that the money offered is insufficient and you instruct them to obtain as much money as possible, they will negotiate on your behalf to ensure a fair sum of money is paid. This may mean the solicitor helping you to raise a grievance. It is important to lodge a formal written complaint to protect your position if there have been acts of discrimination. If a dismissal has taken place, your solicitor will assist with your appeal.
Reference
Where you have been in dispute with your employer, it is a good idea to ask that an agreed reference is attached to the Compromise Agreement with a clause that the employer cannot derogate from this agreed reference.
Post-termination covenants
The Compromise Agreement may reaffirm post-termination restrictive covenants in your contract. Your solicitor should check your employer has not increased their scope. When a Compromise Agreement is offered because there has been a serious breach of contract, a solicitor should advise whether your employer can still enforce the original restrictive covenants. The value of the restrictive covenants to your employer will also help a solicitor assess the fairness of the amounts offered in your Compromise Agreement.
Confidentiality
The confidentiality clause is an extremely important part of the Compromise Agreement for your employer. However, sometimes the scope needs to be reduced to allow you to speak to those closest to you, such as a spouse or immediate family or to be able to tell future employers about the circumstances of your departure.
There may also be clauses preventing you from making derogatory comments against your employer. These can be changed to be mutual clauses, stopping your employer from badmouthing you.
How much will it cost?
Solicitors’ fees vary. martin searle solicitors’ fees for advice on a well-drafted and mutually beneficial Compromise Agreement are usually covered by the employer’s contribution. This is usually between £250 and £500 (plus VAT).
In a situation where you are being offered clearly insufficient compensation sums,
martin searle solicitors offers the following funding alternatives:
- We return to the employer first to ask them to increase their contribution, particularly where the legal or tax issues are complex.
- We explore all funding options, such as whether you have legal expenses on your home contents/buildings insurance.
- You can pay the difference between the employer’s contribution and the total bill based on our individual private fee rates in order for us to negotiate a better offer.
- In all cases we offer a deferred fee arrangement.
When will I receive my money?
Once all parties have signed a Compromise Agreement, compensation is usually paid within 7-21 days. However, certain payments will be made through the payroll on the usual payroll date such as outstanding salary and accrued holiday and bonuses or commission payments.
What service will martin searle solicitors provide?
We are an experienced employment team where all solicitors are specialists in employment law. We will advise you fully on all the implications of signing the Compromise Agreement and will endeavour to ensure you obtain a sum that represents the strength of your potential claims together with a reference.
Want to talk to us?
If you would like to discuss a Compromise Agreement or for any other information relating to employment law please email Fiona Martin or call your local martin searle solicitors’ office on 01273 609911 (Brighton) or 0845 189 0152 (Croydon).
