Compromise agreements

As a general rule, any provision in an agreement which excludes an employee’s right to start legal proceedings against their employer is unlawful. The employee, even after receiving the agreed compensation from the employer in full, may complain to an employment tribunal. The exception to this rule is where an employer and employee have entered into a compromise agreement, which fulfils statutory requirements.

What is a compromise agreement?

A compromise agreement is a formal and legally binding agreement made between an employer and an employee (or ex-employee as the case may be) under which an en employee agrees not to pursue any claims in relation to his or her employment or its termination in return for a financial settlement.

When is a compromise agreement used?

An employer may consider using a compromise agreement as an alternative to going through disciplinary or performance review or redundancy procedures with the employee concerned.

A compromise agreement may be used to resolve all existing disputes and possible future claims once and for all without the necessity of going through tribunal or court proceedings.

Compromise agreements may also be used to settle serious grievances raised by employees, such as constructive dismissal and unlawful discrimination claims.

What are the benefits of using a compromise agreement?

A compromise agreement would be appropriate where the employer desires to take an employee out of the workplace quickly, as it saves the employer going through time-consuming statutory procedures.

A compromise agreement will generally avoid the uncertain outcome of a tribunal or court hearing while at the same time shields the employer from potential unfavourable publicity.

Conclusion

A compromise agreement is a fast and straightforward way to achieve a mutually satisfactory settlement for both the employer and employee. A compromise agreement will also avoid the costs and uncertainty of legal action.

However, compromise agreements are complex legal documents which must fulfil a number of statutory requirements in order to be legally binding. Furthermore, an employee must receive independent legal advice from a ‘relevant independent adviser’ within the meaning of the legislation governing compromise agreements, before signing a compromise agreement. It is therefore recommend that the preparation and review of compromise agreements should always be carried out by experts.