Compromise agreements

Compromise agreements are normally used in a situation where an employee’s contractual, statutory or common law rights are going to be waived or ‘compromised.’ The waiver is usually effected by an employee signing the agreement and receiving an amount of money in return for not taking action to protect or enforce certain rights against the employer. As there is the potential for a situation of this kind to be abused, there are certain requirements that need to be met for a compromise agreement to be considered legally valid and enforceable.

What rights can you compromise?

There are a number of different types of rights than can be compromised, but it is worth remembering that these rights can overlap, meaning that the waiver required can be more complex.

Contractual rights, for example the right to holiday pay, a notice period and the obligation on the employer to pay a salary – these are essentially any rights that an employee has by virtue of the employment contract. It is very easy for an employee to agree to relinquish contractual rights by simply signing an agreement. In order to prevent this happening without the employee being fully informed of what is at stake, the law effectively requires an employee take advice before doing to – from a lawyer, trade union body or the Advisory, Conciliation and Arbitration Service (ACAS).

General law rights (or ‘common law’), for example the right to claim where there has been personal injury, defamation or negligence. It is as easy to sign away common law rights, as it is contractual rights, which is why the same safeguard is required: advice from a lawyer, trade union body or ACAS.

Specific rights, for example when an employee falls into a certain group that is specifically protected by law in a way that other employees are not – such as employees in the public sector. These rights are usually statutory and can be waived in the same way as other statutory rights.

Statutory rights that are enshrined in statute, for example the right to statutory redundancy, fair dismissal, living free from discrimination, receiving a minimum wage, and certain maternity rights. These can only be waived by an employee, working with a trade union adviser or lawyer, signing a ‘valid compromise agreement’ in advance of any proceedings beginning, or an ACAS ‘COT3’ settlement, which may be signed after an employee has started a case against an employer.

A ‘valid compromise agreement’ must be: in writing and signed by the employee, specific to a certain complaint or defined proceeding and must state that compromise agreement validity requirements have been met. The employee must have taken independent legal advice from an identified advisor, who is insured. If these conditions are not fulfilled, an employee can still take action through an Employment Tribunal, regardless of the compromise agreement (although any settlement amount received will need to be repaid). Where these requirements are fulfilled, the employee cannot then take the claim to an Employment Tribunal and the agreement may also prevent the claim being made on a contractual or common law basis.

The requirement to see a legal advisor is in place so that the employee can be made to understand both the terms of the compromise agreement and the effects of signing it. Usually, the legal advisor will sign a certificate as proof that this advice has been given.

The requirement for the legal advisor to have insurance is to make sure that the legal advisor’s insurance policy will cover the advisor in a situation where negligent advice is given to the employee and the employee then makes a claim against the advisor. As the receipt of legal advice by the employee is one of the components of a valid compromise agreement – and it will benefit the employer for the employee to receive it – the employer will usually pay towards the cost of the legal advice. The contribution will vary, depending on the seniority of the employee and may be anywhere from £250+VAT up to several thousand pounds.

There is no requirement for the legal advisor to help negotiate the clauses in the agreement, advise on any additional rights, or to offer a view on whether the employee is getting a good deal. Where a legal advisor is asked to provide this kind of assistance, it will not usually be covered by the costs that the employer is willing to contribute towards and the employee will need to meet this fee personally.

Where an employee does request that the legal advisor provide a view on whether the deal is reasonable, this will focus on whether the compromise agreement payment stands up in the light of contractual entitlement, the value of potential legal claims and the likely costs. There are many factors involved in a conclusion such as this, for example the ease or difficulty of predicting the employee’s lost earnings, whether the employee is likely to be unemployed or be able to get another job, and what allegations might be made against an employee if a claim went ahead, in order to devalue it.

What else does the compromise agreement normally cover?

The agreement can essentially cover anything that both parties agree to, for example ensuring that the employer will provide a reference, and how this will be given, is a common clause in compromise agreements. If the termination payment is being offered tax free, there may be a requirement for a clause in the agreement in which the employee indemnifies the employer in the event that HMRC taxes the payment. An employee may be able to receive £30,000 in tax-free compensation, but this will vary from case to case. In general, payments that are the result of a contract are subject to national insurance contributions and income tax.

A compromise agreement will not usually cover:

Accumulated pension rights – where the pension fund is solvent, rights that have already built up cannot be taken away by an employer outside of the fund rules.

Personal injury – usually a compromise agreement will either avoid mentioning personal injury claims, or will restrict the right to pursue a claim to personal injuries occurring in the future, not those the employee knows about at the time of the agreement.

To sign or not to sign

Whilst legal advisors can provide sound advice, the ultimate decision as to whether or not to sign a compromise agreement must be made by the employee. There are a number of possible consequences of not signing the agreement, and the effects of these can be discussed with the employee’s advisor – for example, not signing the agreement may result in termination of employment.

Note: where the employee does not sign the agreement, it is unlikely the employer will then contribute towards the employee’s legal advisor costs as set out above.