Compromise Agreement
Compromise Agreements
What is a compromise agreement?
Compromise agreements are binding contracts whereby the employer and employee agree, by mutual consent, to terminate the employment relationship. Compromise agreements were created some years ago by statute (Government legislation) for political reasons (to reduce the number of employment tribunal claims and consequent drain on public resource). They are quite standardised documents although there are elements where negotiation and careful drafting can be vital.
The object of a compromise agreement is to provide the employee with a financial inducement and possibly guaranteed reference, in return for waiving rights to make claims against the employer in the future.
Advantages of compromise agreements for employers
- to end the employment more quickly
- guarantees that the employer will not have to face the cost, time input and uncertainty of Employment Tribunal or Court claim
- Enables the employer to protect itself against having business or employees taken by the employee in the future by including post termination restrictive covenants
- The employer can require the circumstances surrounding the termination of the employment to be kept confidential
Risks of compromise agreements for employers
An employer should always take care when offering a compromise agreement or in negotiations and these should be expressly “without prejudice”. The employer should also continue with parallel actions such as disciplinary or redundancy process until the agreement has been fully concluded. If handled badly, an employer can end up providing the employee with a stronger potential claim.
Necessary legal formalities
To ensure a compromise agreement is legally binding and effective, it has to include certain clauses and the employee must have obtained independent legal advice from a solicitor or other qualified advisor who must sign the agreement to confirm they have advised the employee. Normally, although the employee can choose the adviser, the employer pays because it is in the employer’s interests to have a legally binding agreement.