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You are in: Home Page | About Thompsons | Compromise Agreements

An Employee’s Guide to Compromise Agreements

The information below is intended for use by people who are not Trade Union members.  This is prepared as general advice and should not be relied on without taking specific advice about your situation.  If you think you may have an employment tribunal case and you decide not to enter into an Agreement to compromise that claim, act quickly, there is a three month time limit for bringing most employment tribunal claims. If you are a Trade Union member looking for advice about a Compromise Agreement, read our Compromise Agreement Guide for Union Members.

What is a Compromise Agreement?
What is Redundancy?
What is a Dismissal?
What is Unfair Dismissal?
Why are you being asked to sign a Compromise Agreement?
What are the legal implications in signing a Compromise Agreement?
What claims will you be able to make, if any, once the agreement is signed?
Will you have to pay tax on the compensation payment?
Can you tell anyone about the Compromise Agreement?
Can you say what you want about the employer after the agreement is signed?
Can you go to the press about what has happened?
Will the employer give you a good reference?
What should you do now?
Who pays?
What service will Thompsons provide?

What is a Compromise Agreement?

A compromise agreement is a legally binding agreement usually between an employee and employer when the parties want to set out the terms and conditions reached when a contract of employment is to be terminated or a dispute is to be resolved (when the employment contract is not being terminated).

There are a number of different circumstances eg. redundancy, by mutual agreement, dismissal, to settle an Employment Tribunal claim when such an agreement can be used.

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What is Redundancy?

A reduction or ceasing of a particular kind of work. This can involve a reduction in the type of jobs required or possibly a complete closure of a business or department. This could also involve a reorganisation of work where a business continues to trade but restructures its workforce to such an extent that different jobs are required and some posts are no longer needed.

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What is a Dismissal?

When the employer ends the employment. This can be with or without notice and includes a redundancy, when a fixed term contract comes to an end and is not renewed or when the employee ends the contract and the reason is the employer's conduct.

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What is unfair dismissal?

The employer has to show that the reason for the dismissal was fair and the decision to dismiss was reasonable. The employer also has to show that the way they dismissed the employee was fair and followed the statutory procedures. Some examples of a fair dismissal would be if the dismissal was based on the misconduct or the capability of the employee.

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Why are you being asked to sign a Compromise Agreement?

The purpose of a Compromise Agreement is to provide certainty for both parties and it is very important that you understand what you are agreeing before signing such an agreement.

In fact it is a requirement of the Compromise Agreement that you have received independent legal advice from someone professionally qualified (usually a solicitor or qualified trade union adviser) to give that advice (s.203 Employment Rights Act 1996). In most cases the employer will pay or contribute towards the legal expenses incurred in receiving the legal advice on the agreement. We offer expert free legal advice and we charge the employer on conclusion of the Compromise Agreement.

The most important thing to understand about a Compromise Agreement is that in signing the agreement and accepting the settlement terms you specifically exclude your right to make a claim against your employer in the Court of Employment Tribunal.

If you are owed any wages, bonuses, accrued but untaken holiday pay it all needs to be dealt with in the agreement.

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What are the legal implications in signing a compromise agreement?

The most important thing to understand about a Compromise Agreement is that in signing the agreement and accepting the settlement terms your right to bring a claim against your employer in a Court or Employment Tribunal is specifically excluded.

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What claims will you be able to make, if any, once the agreement is signed?

Generally, you will only be able to make three types of claim.

(i) if the employer breaches the agreement, e.g. does not pay to you the money agreed in the agreement, you could take a breach of contract claim.

(ii) claims in respect of personal injury are usually still allowed, although the agreement may exclude personal injury claims in respect of injuries of which you are already aware of at the time that the agreement is signed. This would usually be the case when the reason for termination is due to sickness absence for stress or depression.

(iii) you should still be able to make claims in respect of accrued pension rights.

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Will you have to pay tax on the compensation payment?

Whether tax is payable depends on how the payment is made up. You
will usually have to pay tax and national insurance on any wages and holiday pay.

Generally, the first £30,000 of a payment made as compensation for loss of employment is tax-free. Redundancy payments up to £30,000 (both contractual and statutory) are usually tax-free. Payments in lieu of notice are tax free, provided that the employer does not have a contractual right to make a payment in lieu of notice and, in a redundancy situation, provided that the employer does not usually make a payment in lieu of notice as a matter of course. Benefits such as continued use of a mobile phone or company car are usually tax-free.

Even if the payment is being made to you tax free, the agreement normally makes it clear that if the Inland Revenue states that tax or National Insurance is payable, you will be responsible for paying it, not the employer.

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Can you tell anyone about the Compromise Agreement?

A confidentiality clause is fairly standard in compromise agreements. Sometimes a confidentiality clause will only cover the terms of the agreement. This would mean that you can still tell people that you have come to an agreement with your employer about the termination of employment or Employment Tribunal claim, but you cannot say what the terms of the agreement are (for example, that you will receive a sum of money). Sometimes, the employer insists that you cannot even tell people that there has been an agreement.

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Can you say what you want about the employer after the agreement is signed?

Sometimes an agreement will contain a non-derogatory statements clause which
basically prevents you from bad-mouthing the employer or people who work or have worked for the employer. Accordingly, you should therefore be careful what you say about the employer, particularly in a public setting where comments may be reported back. In negotiating a non-derogatory statements clause it might be possible, by agreement, to make the clause mutual, so that neither party can make derogatory or disparaging statements about the other.

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Can you go to the press about what has happened?

This depends on the type of confidentiality clause in the agreement, if any, and whether there is a non-derogatory statements clause. You need to take advice from your legal advisor before going to the press if you have signed a compromise agreement.

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Will the employer give you a good reference?

There is generally no legal obligation on an employer to provide a reference. Any reference that is provided should be true, accurate and fair. If not, the employer may be guilty of misrepresentation. It is possible to incorporate a reference into the compromise agreement, in which case the reference becomes part of the agreement.

It is usually a good idea to try to get a reference incorporated into the agreement and this should be done early on in negotiations.

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What should you do now?

Fill in the information on the questionnaire and either send it by email to compromiseagreements@thompsons.law.co.uk or by post FAO - Compromise Agreements, Thompsons Solicitors, The New Union House, 2 Harbour Avenue, Plymouth, PL4 0BJ. One of our expert employment solicitors will contact you directly.

If you are unable to print off the questionnaire or complete it online for any reason, give us a call on 08000 224 224 and we will be happy to send you a copy in the post.

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Who Pays?

Employers should cover the cost for the advice on your compromise agreement.

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What service will Thompsons provide?

An expert employment solicitor from Thompsons will consider the terms and conditions of your compromise agreement and provide you with written advice on your agreement. If there are amendments needed the solicitor will contact your employer and negotiate amendments.

If you have any specific questions you will be able to speak to a solicitor concerning the wording of the agreement.

If the wording is agreed and acceptable in the opinion of our expert then arrangements will be made for the agreement to be signed by you and by our solicitor and then forwarded to your employer for their signature.

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