Compromise Agreements and Redundancy

Are you being made redundant?
Mid disciplinary or performance proceedings and looking to do a deal?
Being offered severance terms?

If so, it is likely that you will be asked to sign a Compromise Agreement, but what does this entail?

The aim of a compromise agreement is to achieve a ‘clean break’ between an employer and employee when a contract of employment is to be terminated or a dispute is to be resolved. Compromise agreements are used in a range of circumstances, most often in redundancy situations where the employer is making an enhanced redundancy payment in return for a guarantee that the employee will not bring any claims against them.

At our offices in Bromley we have a team of specialist employment solicitors and redundancy lawyers who are on hand to advise you on the terms and effect of the proposed agreement and in some circumstances to negotiate more favourable terms on your behalf. We also draft compromise agreements for employers. 

What is a compromise agreement?

A compromise agreement is a legally binding document which sets out the terms and conditions reached when a contract of employment is to be terminated or a dispute is to be resolved. Generally a compromise agreement is signed in consideration of a payment from the employer to the employee.

What is the effect of a compromise agreement?

The effect of you signing a compromise agreement is that in exchange for a termination payment and any other benefits your employer agrees to give you, you will be giving up most, if not all, of your employment-related statutory and contractual rights. Once you have signed the agreement, you will in most cases not be able to bring any claims in respect of your employment or its termination.  It is therefore very important that you meet with us so that we can consider if you have any potential claims against your employer. It is also important to determine what payments are due to you from your employer and to ensure that these are included in the compromise agreement itself rather than in any other documentation.

Do compromise agreements have to be in a specific form?

For a compromise agreement to be valid the following conditions must be met:

• the agreement must be in writing;
• the agreement must relate to a particular complaint or proceedings;
• the employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effects on the employee’s ability to pursue any rights before an employment tribunal;
• your adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by the employee in respect of the advice  given (which this firm has);
• the agreement must identify your adviser; and
• the agreement must state that the conditions regulating the compromise agreement have been satisfied. 

Can I ask my employer for more money?

If instructed we can ask your employer to pay an increased sum in relation to the ex-gratia payment. We will also consider your contractual and statutory entitlements to ensure that your employer is paying the correct sums due to you. Very often we achieve more favourable settlement terms including increased termination payments for our clients. You should be aware however that asking for an increased sum in relation to the termination of your contract will constitute a ‘counter-offer’.  The effect of a counter-offer amounts to a rejection of the original offer and there is therefore a risk that your employer will withdraw the offer of a compromise agreement.  The reality of the situation is that if your employer is keen to terminate your employment by means of a compromise agreement it is more likely that it will simply not budge on the termination figures, rather than withdrawing the whole deal. 

What is the tax position?

The current position is that it is possible, depending on the circumstances, to treat up to £30,000 of an ex-gratia/redundancy payment made under a compromise agreement as exempt from income tax if the payment comes within section 401 Income Taxes (Earnings and Pensions) Act 2003.  Where however, part of the termination payment is in lieu of notice and or/other benefits deriving from the employment relationship (i.e. any payment you receive that is contractual), that proportion of the payment is likely to be taxable.

Who pays for my legal advice?

There is no legal requirement for an employer to pay your legal fees in taking advice on a compromise agreement however in practice employers will normally make a contribution towards some or all of your legal costs if you sign off on the Agreement. It is often possible for us to negotiate an increase in the contribution so that there is no cost to you at all.

It is important that you instruct an adviser who will go beyond merely explaining the agreement and signing the adviser’s certificate but who will advise you about whether the severance terms being offered are reasonable given the value of any claims you might have against your employer and thereafter re-negotiate any unfavorable terms contained within the agreement. There are occasions where signing the proposed compromise agreement will not be in your best interests.

What if my employer does not pay me?

If your employer does not comply with the terms of the compromise agreement, your remedy will be to claim breach of contract and damages in the county or high court, if you have suffered loss as a result of the breach. This firm has a specialist debt collection department and will be able to assist you with enforcing the terms of the agreement against your employer.