LCF Information Notes to Law Centres on what is a Compromise Agreement?
Caveat: Thesenotes are compiledfor information only and the information can be found in searching against advice for employees on the web, They are not intended as a definitive statement of the law. Employment Advisers should check for current accuracy and the interpretation of legal rules.
Where not otherwise indicated we have used extracts from
Notes drawn from LCF 2010 National Conference workshop and extended in March 2012
IntroductionVery strict rules apply to COT3 settlement agreements (arranged through ACAS) and compromise agreements (not involving ACAS) under which an employee agrees not to pursue a claim arising from the employer's breach of anti-discrimination or employment legislation. Such settlements also frequently include provision for related issues such as contractual rights, confidentiality and references.
A 'compromise agreement' is a legally binding agreement following the termination of employment. It usually provides for a severance payment by the employer, in return for which the employeeagrees not to pursue any claim to an employment tribunal. Quite often, the compromise agreement will also deal with the notice element in the contract of employment and may provide for a "payment in lieu".
Employers have increasingly used compromise agreements as a mechanism for preventing possible future complaints to a tribunal, especially in redundancy situations.
Compromise agreements are recognised by statute and are the only way a claim can be legally binding without tribunal proceedings having been initiated, apart from a COT3 settlement.
The employeemust have the compromise agreement explained by an independent solicitor before the agreement becomes binding.
The solicitor giving the advice must also sign the agreement and certify that the appropriate advice has been given.
Edited From www.compromiseagreements.co.uk
Why is a Compromise Agreement Necessary?
The use of compromise agreements in redundancy situations has rapidly developed and is initiated mainly by employers who want to prevent employees complaining to a tribunal after they have been made redundant. However an employee can also propose a compromise agreement and produce the first draft.
If an employer does not comply with the law in making redundancies (perhaps through failing to consult properly, failing to use fair selection criteria etc) an employee can complain to a tribunal that the redundancy was unfair. This can be done after the redundancy and could result in an award of compensation or even reinstatement.
The only way an employer can be sure that an employee will not complain to a tribunal after redundancy is to persuade them to sign away their right to do so. This can be done in a compromise agreement and has the effect of turning the redundancy package into a "full and final" settlement of any claims the employee has against the employer.
Compromise agreements are also commonly used in employment situations other than redundancies and have the same “full and final” effect.
WHAT TERMS does a Compromise Agreement have to contain?
Thompsons.law.co.uk describes as follows:
The compromise agreement will state the full breakdown of the payments the employee will receive and the extent to which the sums will be paid free of tax. Usually, up to £30,000 compensationcan be paid without deduction, but you will have to give tax indemnity to your employer within the agreement. This is entirely usual.
The compromise agreement will also provide for confidentiality both in terms of your employers trade secrets and business affairs and also of the terms of the agreement. You will be paid a small additional sum for agreeing to this-usually a few hundred pounds. You will also usually be required not to make any derogatory comments against your employer. Some employees prefer such agreements to be mutual, and employers are often receptive to such request.
The compromise agreement may confirm the existing post-termination restrictive covenants that you are already bound by under your contract of employment. In some cases, the covenants are new, having appeared in the compromise agreement for the first time. In either case, you need to take specific advice on this as your ability to work for a competitor and/or service old clients and customers could be hampered after you leave.
There will be a long list of statutes in the compromise agreement (such as the Race Discrimination Act, Sex Discrimination Act, Employment Rights Act) and many more, under which you will agree not to bring a claim. You should not be concerned by this. The compromise agreement is intended to be in full and final settlement of all claims but the employer needs to list these to be able to enforce the agreement.
The Court of Appeal said in Hinton -v -University of East London (LELR 102) that, to fully compromise a potential claim, the agreement has to specifically identify the claim, either by describing it or by referring to the relevant section of the statute.
Some agreements set out fairly exhaustive lists of potential claims, while others, drafted by the employer’s adviser, often only list the ones that the employer thinks are potentially relevant.
Personal injury claims:Experienced advisers are aware that it is essential to exclude any potential personal injury claims from the effect of the compromise agreement
LEGAL ADVICE- Is a Solicitor needed?
Compromise agreements can be written in very legalistic language and can refer to sections of Acts and Regulations which the employee may never have heard of. Because of this and because it is important that the employee understands the effect of the agreement, it is a legal requirement that they get professional advice on what the agreement means. It is also a legal requirement that the employee’squalified adviser signs the agreement to confirm that advice has been given. The adviser will consider if the terms offer the correct protection including if there is an offer of a suitable amount of compensation, and if the agreement reflects any other terms that are important to the employee.
According to the Employment Rights (Dispute Resolution) Act 1998, that advice can only be given by a qualified lawyer, a qualified trade union official, or a qualified advice centre worker, all of whom must be covered by an appropriate certificate of indemnity insurance.
See,for reference to specific legislation relating to compromise agreements,
Extended costs
In exceptional circumstances the Law Centre may have to consider work beyond that which is covered by the initial agreement to advise on a compromise agreement. For example,
that the advice needs to be extended , will take longer time and the employer won’t pay beyond the initial agreed fee or
the employee decides not to sign the compromise agreement and wants the Law Centre staff member to represent them.
The Law Centre will have a policy as to whether they can act or continue to act, in either example, or will have to refer elsewhere. Such situations need to be thought out and covered in the client care letter. (There is a parallel with letters for LSC work when the client care letter limits the extent of the work that the Law Centre will undertake and/or the limitation on the work that the LSC will pay for).
COMPROMISE AGREEMENTS AND the Equality Act
Very strict rules apply to settlement agreements (arranged through ACAS) and compromise agreements (not involving ACAS) under which an employee agrees not to pursue a claim arising from the employer's breach of anti-discrimination or employment legislation. Such settlements also frequently include provision for related issues such as contractual rights, confidentiality and references.
One of the rules relating to compromise agreements is that the employee must receive independent advice on the agreement from a qualified lawyer, certified trade union official or certified advice centre worker, and the advisor must have appropriate indemnity insurance. But due to a drafting error, s.147 of the Equality Act 2010 states that a person cannot be an independent advisor on a compromise agreement if they are already acting for the employees.
From 6 April 2012 this drafting error is amended by the Equality Act (Amendment) Order 2012 to make clear that a solicitor, authorised trade union official or member or authorised advice centre worker already acting for the employee can be an independent advisor. See
From Sandy Adirondack’s Legal Handbook for Voluntary Organisations Update
Can employees still make claims after signing a compromise agreement?
Employees can sometimes still bring a few very limited claims in the following circumstances, even if they have signed a compromise agreement:
• if the employer breaches the agreement, for instance they do not pay the money agreed
• claims in respect of personal injury, unless the agreement excludes personal injury claims for something that the employee knew about when it was signed (for instance, where the termination is for sickness absence or a personal injury claim for stress or depression)
• accrued pension rights.
Cg/LCF Development Team / April 2012
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