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Compromise agreements

A compromise agreement (also known as a 'settlement' agreement, ‘termination agreement’ or ‘severance agreement’) is a contract between an employer and a departing employee. The key terms of an agreement typically provide for the payment of a negotiated financial sum by the employer to the employee and a promise from the employee not to pursue a legal claim against the employer. Sometimes the employer will also agree to provide a reference.

Waiver of rights

Unless Acas gets involved in the case and arranges what’s known as a ‘COT3 settlement’, a compromise agreement is the only way you can waive your rights under the Employment Rights Act, including your right to claim unfair dismissal, unlawful discrimination and/or redundancy.

Requirements for validity

To be valid, a compromise agreement must:

  • be in writing;
  • identify a ‘relevant independent adviser’ (see below for who qualifies);
  • identify the particular proceedings to which it relates (e.g., unfair dismissal, redundancy, etc);
  • not be signed by the employee or worker until they receive advice from a ‘relevant independent adviser’ with adequate insurance or a professional indemnity.

These requirements are strictly applied. If any of them are missing the agreement will not be enforceable.

Who qualifies as a ‘relevant independent adviser’?

The following qualify as relevant independent advisers:

  • solicitors and barristers;
  • certified trade union and advice centre representatives;
  • Fellows of the Institute of Legal Executives employed by a solicitors’ practice.

Negotiating the terms of the compromise agreement

A compromise agreement may include a number of terms, including provisions concerning confidentiality, payment of tax, return or retention of property, and restrictions on the type of work the employee can do after termination of employment (known as a ‘non-compete clause’). It may also be possible to agree wording on a letter of reference, which may be needed to find a new job.

When negotiating the terms of a compromise agreement it is important to ensure that compensation is adequate because after it is signed it is usually impossible to get any additional money. Independent expert advice is essential.

Compensation package

Compensation is not set by statute. The employer and employee must reach an agreement. Some of the factors taken into account when deciding on the level of compensation include:

  • the length of employment;
  • the reason why the employer is dismissing the employee; and
  • the employer’s financial condition.

Paying tax

Whether tax is payable on the money depends on what the compensation is for. Generally, employees have to pay tax and national insurance on any wages and holiday pay. Ordinarily, however, the first £30,000 of a redundancy payment or other compensation for loss of employment is tax-free. Employer benefits like continued use of a mobile phone or company car are also usually tax-free.

Confidentiality clauses

Most agreements include provisions concerning confidentiality. This usually means that you can tell people that you came to an agreement with your employer about the termination of employment or a tribunal claim, but you cannot disclose what the terms of the agreement are.

Claims after the agreement is signed

As stated above, the agreement must identify the particular proceedings to which it relates, e.g., “unfair dismissal”. It is not adequate to use a rolled up expression such as all “statutory rights”.

Even where the agreement does validly compromise all rights under the Employment Rights Act, it is not possible to waive the following types of claim:

  • Breach of contract: if the employer breaches the agreement, e.g., fails to pay you the amount agreed in the compromise agreement, you can sue for breach of contract.
  • Personal injury claims: except in respect of injuries you already knew about when you signed the agreement.
  • Accrued pension rights.

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