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Compromise Agreements

01 Oct 2010

Employment Factsheet No. 1

A compromise agreement is an agreement which sets out the terms (which can include financial terms) on which your employment will be ended. For it to be valid certain formalities must be observed.

What is a Compromise Agreement?

A compromise agreement is a legally binding agreement, usually between an employee and employer, in which the parties set out the terms agreed for a contract of employment to come to an end or for a dispute between them to be resolved.

They are often used in situations involving redundancy and dismissal.

Typically it will provide for a severance payment by the employer, in return for which the employee will agree not to bring a claim against the employer in the courts or employment tribunal. Usually the agreement will also deal with issues such as the length of notice and for a “payment in lieu” to be made.

When are compromise agreements used?

Increasingly, employers are using compromise agreements to prevent the risk of future complaints being made to a tribunal, especially in cases of redundancy and are recognised as the main way a claim can be validly resolved without recourse to a tribunal.

They are also widely used in other employment termination situations such as dismissal, where conflicts between an employer and employee have arisen or where the employee wishes to leave in circumstances where the relationship with the employer has broken down.

What will a Compromise Agreement usually contain?

There are a number of provisions which a compromise agreement must contain if it is to be valid. Richard Nelson LLP can advise you fully upon these. The agreement will not be valid unless:

  • it is in writing;
  • the specific issues affecting the employee are referred to;
  • the employee has obtained independent legal advice as to the terms of the agreement and as to the consequences of entering into it – for example the effect it will have upon the employee’s rights before an employment tribunal;
  • the advice has come from someone with appropriate insurance or an indemnity covering the risk of a claim by the claimant in respect of loss arising as a result of the advice;
  • it identifies the person providing the advice (for example by the adviser signing to confirm that advice has been given);
  • it sets out that those conditions in the relevant legislation have been satisfied.

In addition to the compulsory elements the agreement may also deal with:

  • a breakdown of the payments to be made by the employer to the;
  • a confidentiality clause dealing not only with the employers trade or business secrets and details of business affairs but also with the terms of the agreement itself;
  • the basis upon which the employee will continue to be employed – for example provisions relating to garden leave or the taking of accrued holidays;
  • responsibility for payment of the employee’s legal fees;
  • a requirement that neither party make derogatory comments about the other; and
  • restrictive covenants – either continuing existing covenants in the contract of employment or imposing new covenants.

Why have a compromise agreement?

Compromise agreements can provide an effective method of avoiding legal proceedings and the resulting costs.

Often a compromise agreement is the only way in which an employer can be certain that they will not end up in the employment tribunal or court as a result of the departure from the company of the employee. Their effect is to make any agreement reached a full and final settlement of any claims which an employee may have against the employer.

In addition, a compromise agreement can be a much less stressful means of ending an employment relationship.

Further help

Richard Nelson LLP can help to advise upon, negotiate and draft compromise agreements for you which will ensure that you achieve the best outcome possible.

For more information about the services we can provide and about how we can help you and your business, contact us using the form on the right.

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