North West Employment Law - Specialist Employment Solicitors

AN EMPLOYEE’S GUIDE TO COMPROMISE AGREEMENTS

INTRODUCTION

Compromise AgreementsA compromise agreement can be a quick and effective way to resolve an employment dispute with your employer without the need for employment tribunal proceedings.

A compromise agreement is a legally binding agreement with your employer, usually made to set out agreed terms when your employment ends. In return for offering you a termination payment your employer requires you to give up your rights to make claims about your employment or its termination. Sometimes your employer may ask you to sign an agreement to vary your contract of employment or to settle a dispute, but your employment continues.

LEGAL REQUIREMENTS OF A COMPROMISE AGREEMENT

To be valid the following conditions must be met:

  • the agreement must be in writing and must relate to a particular matter
  • you must receive independent legal advice on its terms
  • the name of the adviser must be stated in the agreement
  • the adviser must have professional indemnity insurance
  • the agreement must state that the conditions relating to compromise agreements have been satisfied.

If you sign a document which does not meet these strict requirements you would still be able to make a claim in the Employment Tribunal.

EFFECT OF A COMPROMISE AGREEMENT

The agreement provides certainty for both sides. You receive the payment referred to in the agreement and your employer knows that you will not bring any claims. This is because the payment is said to be in full and final settlement of any claims that you may have arising from your employment or its termination. If you agree to the terms of the settlement you lose your contractual and statutory rights to bring a claim against your employer in a tribunal or court (except to enforce the agreement). It is important to be aware of your potential claims and their value to ensure that everything due to you (eg unpaid wages, holiday pay, bonus, commission or non-cash benefits) is included in the compromise agreement.

EXCLUSIONS FROM A COMPROMISE AGREEMENT

The following potential claims need to be excluded from the scope of the agreement:

  • personal injury claims (Even if you are unaware of a potential claim there is always a risk that you may subsequently develop an industrial disease which was caused by you working for your employer. You should not sign away your rights to bring such a claim but you may have to confirm that you are not aware of any such claims at the time you sign the agreement).
  • claims to enforce any accrued pension rights.
  • claims for a breach of the agreement itself (You need to retain your right to bring a county court claim for breach of contract just in case your employer fails to pay you the agreed settlement.)
  • where your employment is continuing, any claims arising after the date the agreement is signed.

TAXATION OF PAYMENTS MADE UNDER A COMPROMISE AGREEMENT

Wages to the date of termination of employment and accrued holiday pay are taxable in the normal way.

Normally, up to £30,000 can be paid tax free if it is genuine compensation for loss of employment. This includes both statutory and contractual redundancy payments. If any non-cash benefits are given to you as part of the agreement (eg company car), then a cash value will be put on any such items.

A payment in lieu of notice is a payment made when proper notice of termination has not been given to compensate you for the wages and benefits you would have received during the normal notice period. If the payment in lieu is contractual or your employer always pays notice pay in lieu as a matter of course, the payment is taxable.

When your employer agrees to make payments to you gross they will normally insist on a clause in the agreement to say that you are responsible for any tax that may be payable.

If the total value of the termination package to be made to you exceeds £30,000, tax relief on pension contributions may make it worth asking for part of the payment to be paid into your occupational pension scheme, if you have one. You will need to check with the pension fund trustees if this is possible and seek financial advice as to whether it is appropriate in your circumstances.

RESTRICTIVE COVENANTS

If you have any restrictive covenants in your contract of employment (eg preventing you from working in competition with your employer for a 6 month period), these will normally still apply when your employment ends through an agreement. If you believe that the covenants will cause you difficulty in finding alternative work you should consider asking to be released from the covenants as part of the agreement.

If your employer asks you to agree to a new restrictive covenant as part of the agreement, you should ask for an extra payment for such a restriction. This payment should be mentioned separately because it is always taxable. If it is not mentioned separately, then the whole termination payment may become taxable even if it is less than £30,000.

REFERENCES

Although any reference provided by your employer must be true, accurate and fair, there is no obligation on your employer to provide a reference. As well as agreeing financial terms employers are sometimes prepared to agree the wording of a reference as part of an agreement. If you have left your employer with an agreed reference after a dispute you do not need to worry about what your employer may say to a potential new employer.

Some employers are only prepared to offer a basic factual reference confirming your dates of employment and job title, but even this is better than no reference at all.

CONFIDENTIALITY AND NON-DISPARAGEMENT

Most employers insist that the terms of any compromise agreements are kept confidential. We normally ask for exceptions to any confidentiality clause so that you can discuss the terms of the agreement with your immediate family and any professional advisors.

Often your employer also wants an assurance that you will not make derogatory comments about them after you have left and the agreement is signed.

If your employer asks for these clauses it is reasonable to ask for the clauses to be mutual so that you know that your employer will also keep the agreement terms confidential and will not say anything bad about you.

LEGAL COSTS OF THE AGREEMENT

In nearly all cases your employer will pay for the full cost of your legal advice and there will be nothing for you to pay. This is because your employer wants there to be a valid agreement to prevent you bringing claims, and the agreement will only be valid if you have had legal advice.

OUR SERVICE

If your employment has been terminated or if you have been offered a compromise agreement contact North West Employment Law for advice. We can advise you on and negotiate your agreement for you. If the terms offered to you are inadequate and we cannot negotiate better terms for you then we will advise you how to make an employment tribunal claim

There are strict time limits for you to pursue a claim and you should therefore seek advice as soon as possible.

Individual compromise agreements vary. This guidance is for general information only. Although it is intended to cover most situations, if you are in doubt on what action to take contact NORTH WEST EMPLOYMENT LAW on 01257 231458 and we can advice and assist.

© North West Employment Law 2008