What is a compromise agreement and how does it work?

This business briefing sets out the key issues a business should consider before entering into a compromise agreement with an employee.

What is a compromise agreement?

A compromise agreement is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims and in return the employer will agree to pay financial compensation. Sometimes the agreement will include other things of benefit to the employee, such as an agreed reference letter.

In what circumstances will a compromise agreement be appropriate?

An employee can make a claim against a business under both their contract of employment and under statute. These claims may arise:

• on recruitment;
• during employment; or
• when their employment has been terminated.

In many cases, a business may want to make a payment to an employee in return for an effective waiver of their potential claims. Businesses can enter into an agreement with an employee to settle potential claims when they are still working for the business, but in most situations, their employment will have ended (or be about to end). Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing.

Unlike contractual claims, which can be waived by entering into a contractual waiver of such claims, statutory claims can only be waived in prescribed ways, one of which is by means of a compromise agreement Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Unlike contractual claims, which can be waived by entering into a contractual waiver of such claims, statutory claims can only be waived in prescribed ways, one of which is by means of a compromise agreem

What are the legal requirements for a valid compromise agreement?

For a compromise agreement to be legally binding, there are a number of conditions that must be met:

• The agreement must be in writing.
• The agreement must relate to a particular complaint or particular proceedings.
• The employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official) on the terms and effect of the proposed agreement and its effect on their ability to pursue any rights before an employment tribunal.
• The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee for the advice.
• The employee’s adviser must be identified.
• The agreement must state that the conditions regulating compromise agreements have been satisfied.

Possible content of a compromise agreement

Other than the legal requirements listed above, the contents of a compromise agreement are largely at the discretion of the business and the employee involved. Examples of common clauses include:

• Compensation for loss of employment.
• Contribution to legal fees.
• Waiver of claims by the employee, including warranty that the claims listed are the only claims which the employee has against the employer.
• Re-assertion or modification of existing restrictive covenants.
• Indemnity from employee in relation to tax and National Insurance Contributions.

Confidential information

Protecting confidential information is usually crucial to a business and therefore compromise agreements often contain confidentiality provisions, for example, the employee agrees:

• Not to use any confidential information.
• Not to disclose any confidential information to any person, company or other organisation.
• To keep the terms and existence of the agreement confidential.
• To not make any derogatory comments about the employer (or any individuals employed by it) to a third party.

Which types of claim can be settled by a compromise agreement?

A large number of statutory claims can be settled by a compromise agreement, for example claims for:

• Unfair dismissal.
• Pregnancy or maternity-related discrimination.
• Discrimination, victimisation or harassment related to sexual orientation.

Which types of claim cannot be settled by a compromise agreement?

There are a number of statutory claims that cannot be settled by entering into a compromise agreement, including some types of:

• Personal injury claims.
• Pension claims.
• Claims following the transfer of a business.

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