Managing Compromise Agreements

A compromise agreement provides a way of managing an employment law dispute that arises with an employee without recourse to the employment tribunal.  In July 2013 the law was updated and ‘settlement agreements’ were introduced.  Whilst very similar to compromise agreements there is one big difference.  A compromise agreement can only relate to an ongoing dispute whereas settlement agreement can be offered where there is no dispute, often when there is an issue with performance.

When a genuine dispute arises, either party can suggest a compromise agreement but there is no obligation on either side to agree. In most cases, a compromise agreement is a legally binding agreement between an employer and an employee when an employee has a grievance and agrees to waive the option of pursuing their claims at the Employment Tribunal In return for financial compensation from their employer. 

In order for a compromise agreement to be valid and legally binding it must be:

  • The compromise agreement must be drafted in writing
  • The cause of the dispute – the particular complaint – must be outlined
  • The employee must have received independent legal advice on the potential consequences and fully understand the impact on their rights related to the employment tribunal. Advisory, Conciliation and Arbitration Service (ACAS) recommends a ten-day period to allow the employee to consider their options.
  • The employee’s independent legal advisor must hold current professional indemnity insurance that covers the risk of a claim arising from the advice given to the employee.
  • The independent legal advisor must be clearly identified.
  • The compromise agreement must clearly state that all the conditions relating to the terms of a compromise agreement have been met.

Whilst the clauses found in a compromise agreement vary depending on the nature of the dispute, the frequently found clauses in a compromise agreement are:

  • The amount of the contribution to the employee’s legal fees
  • The amount of compensation for loss of employment
  • Establishing that the claims contained in the compromise agreement are the only claims the employee feels they have against their employer
  • Outline of restrictive covenants
  • Indemnity from the employee relating to tax and national insurance
  • Neither party to use or disclose confidential information to any individual, organisation or business.
  • The existence and terms of the compromise agreement are confidential
  • No derogatory comments about the employer or any of their employees may be made to a third party by the employee

The types of disputes that are the subject of a compromise agreement often relate to issues involving discrimination, harassment, unfair dismissal, victimisation and bullying.  Giambrone & Partners’ first-class employment law team points out that a compromise agreement removes the dispute from the public arena and protects the business from reputational damage which can occur regardless of the rights or wrongs of the dispute.  The dispute will remain private and in the unlikely event that the employee does reveal the dispute and it becomes public knowledge there is robust legal recourse available to the employer.

There are some instances where an employee raises a spurious dispute and has no intention of taking the matter to the employment tribunal as the objective is obtaining a compromise agreement and financial compensation.  In such a situation it should be remembered that even in those circumstances reputational damage can be inflicted and all negotiations should proceed with the utmost caution.

For more information about compromise agreements please click here