What is a Compromise Agreement and how can I use it?

Oct 15, 2021

The term “Compromise Agreement” is one that many employers have heard of but are not always clear what is involved.

Used well, a compromise agreement – now actually called a Settlement Agreement – can provide a constructive way to bring a difficult employment issue to an end.

Whilst it can also be used as part of an ongoing employment relationship, it is most commonly used as part of bringing employment to an end.

Essentially a Settlement Agreement is a written agreement under which an employee receives a consideration –  usually a lump sum payment – in exchange for agreeing that he or she will waive their rights to bring or pursue an employment claim against you as employer.

For example, they may waive statutory claims such as unfair dismissaldiscrimination or entitlements to a redundancy payment. 

(Some claims, such as personal injury and pension claims, cannot be waived)

Each agreement is specific and will be tailored to meet the facts and circumstances of the case.

However they are some key elements that apply to all Settlement agreements:

  • The Settlement Agreement must be in writing
  • the employee must receive independent legal advice – this means that the employee must have the agreement and its implications explained fully to them by an independent advisor – usually an employment solicitor or trade union official. The cost of this is typically covered by the employer.
  • The termination payment made as part of a Settlement Agreement may include a payment in lieu of notice and a sum often related to length of service. Usually the first £30,000 of a termination payment can be paid tax free under a settlement agreement.
  • A settlement agreement will also usually seek to preserve or add duties of confidentiality and restrictive covenants.

The advantage for the employer is that they are able to draw a line under an employee’s complaint or departure, where an employment relationship has broken down, and are protected from future claims.

The advantage for the employee is the financial sum, and often a quicker and less painful way to end the employment relationship. A Settlement Agreement will usually also include an agreed reference.

A breach of the settlement agreement can result in legal action in a court of law, so  it is important that both sides understand exactly what is involved.  We are happy to advise employers on settlement agreements to ensure a successful resolution.