Compromise agreements

Overview

• A compromise agreement (also known as a severance agreement) is an agreement between an employee and his or her employer.
• It is an agreement whereby the employer agrees to pay the employee a sum of money to settle (compromise) claims which arise on termination of employment. The employee agrees in exchange not to pursue a particular claim or claims.
• It is not necessary for tribunal proceedings to have been started or for a grievance to have been raised for a compromise agreement to be valid.

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Conditions

• The law (s. 203 of the Employment Rights Act 1996) lays down certain conditions which must be met in order for a compromise agreement to be valid. These are as follows:
  • the agreement must be in writing and identify the advisor
  • it must relate to the particular proceedings, i.e. the only claims that can be settled are claims that have already been raised by the employee
  • the employee must have received independent advice as to the terms and effects of the proposed agreement, in particular the fact that the employee will not be able to pursue his or her rights before a tribunal. Such independent legal advice must have been received from one of the following:a barrister; a solicitor; a legal executive; an officer, oficial, employee or member of an independent trade union (as long as he or she is certified as competent to give such advice and authorised to do so); or an advisor working in an advice centre (as long as he or she is certified as competent to give such advice and authorised to do so)
  • the advisor must be insured to cover the risk of any claim by the employee relating to the advice
  • the agreement must state that the conditions regulating compromise agreements are satisfied (it must refer to the statutory provisions governing compromise agreements in respect of each complaint that is covered)
• The adviser does not have to advise on whether the agreement is a 'good deal' for the employee. All that is required is that he or she advises what the terms of the compromise agreement are, e.g. the scope of the claims, what claims are being compromised, how any payment would be treated for tax purposes, etc. (see McWilliam v Glasgow City Council)

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Common terms

• The following terms are common in compromise agreements and those marked with an * are essential:
  • the names of the parties*
  • the date of termination of the employee’s employment*
  • the reasons for termination
  • the claims and/or potential claims to be compromised*
  • the amount to be paid to the employee*
  • the taxation position relating to the payment (and often a tax indemnity in favour of the employer)*
  • provision for the return of company property (e.g. mobile phones, company car)
  • whether cover under life assurance/medical insurance cover can be continued under the terms of the scheme
  • the resignation of any directorships or other appointments
  • transfer of any nominee shares
  • any new restrictive covenants or clauses dealing with confidentiality and the financial consideration
  • any agreed reference or announcement to be made

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Claims that can be waived

• A compromise agreement should set out which claims are being compromised – a blanket compromise agreement will not be effective.
• Claims should be referred to individually although it is not necessary to have a separate compromise agreement for each statutory claim.
• Claims which can be compromised include:
  • breach of contract
  • data protection rights
  • discrimination – all types
  • equal pay
  • failure to inform and consult
  • harassment
  • flexible working claims
  • holiday pay
  • maternity, paternity, adoption or parental leave rights
  • outstanding pay, pension, overtime, bonus or commission
  • part-time or fixed term rights
  • pay in lieu of notice
  • protected disclosures
  • redundancy payment
  • remuneration for a protected period
  • suspension from work
  • trade union membership or activity
  • unfair dismissal
  • unlawful deduction from wages
• Not all statutory claims can be compromised. For example, an employer's statutory consultation obligations or where there is to be a transfer of an undertaking covered by TUPE, cannot be excluded.

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Resources

• Compromise agreements

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