An Employment Solicitor’s Guide to Your UK Compromise Agreement

Compromise agreements:

A UK compromise agreement is a formal contract created between an employer and employee in settlement for termination of their employment.

The agreement is a ‘compromise’ of terms between the employer and employee. It will normally include a compensatory payment and a list of termination clauses. These provisions make sure that the agreement is final and therefore no future legal proceedings can be brought, such as the employee looking for more compensation at a later date.

the signing of the employment contract, close-up

Why would I seek a compromise agreement?

Your employer has to abide with employment law which, means that they cannot merely ‘contract out’ from providing employee rights. In light of this, a compromise agreement provides a solution to ending an employment relationship amicably.

When both parties sign a compromise agreement, neither is then able to start legal proceedings at an employment tribunal. Due to the importance of such an arrangement, it is always advisable to seek professional legal advice before entering into such a contract. A solicitor expert in negotiation skills will make sure that any settlement amount offered is reasonable and fair according to your circumstances.

Who pays for a compromise agreement?

Usually an employer will cover the costs of creating a compromise agreement. Your Solicitor will normally invoice the employer direct for the costs of drawing up such an agreement (costs usually estimate around £250 – £300 depending on the complexity of the agreement).

It is however, your responsibility to ensure that the employer pays these costs and there is the possibility that extra work need be carried out which, will then be charged to you.

Is the content of a compromise agreement confidential?

The level of confidentiality varies from contract to contract. Some agreements will merely request that the employee does not discuss the content with fellow employees. However, some will contain vast provisions preventing either party from discussing the contract with outside parties. An employer will sometimes request that neither party admits to the existence of the compromise agreement.

Clauses that prevent both parties from making degrading comments about the other are often included in compromise agreements.

What happens if I do not want to consent to the proposed agreement?

An employee is under no legal obligation to sign a compromise agreement. If you decide not to sign the agreement then you can start proceedings against your employer at an employment tribunal. However, bear in mind that a compromise agreement may carry more favourable terms then say a redundancy or tribunal pay-out.

An experienced solicitor will be able to negotiate the terms of the agreement on your behalf. They should ensure that you receive a fair and reasonable settlement from your employer that you are willing to consent to.

Do I have to pay tax and national insurance on compensation that I receive under a compromise agreement?

An employee is entitled to receive a payment up to £30,000 which is tax and national insurance free. However, if the compensation money contains outstanding wages and holiday pay, then tax and national insurance will be payable on this proportion.

If the agreement contains a PILON (payment in lieu of notice) clause, then HMRC will class this as a payment of salary and it will be subject to tax and national insurance as normal.

The employer will normally seek to have a tax indemnity clause included in the contract. This means that in the event that any tax and national insurance is payable, then is becomes the employee’s responsibility to settle this payment with HMRC. In any event, to make sure your UK compromise agreement is binding, you need to take independent legal advice on it – make sure you do so from employment law solicitors who specialise in compromise agreements.