60 second guide to compromise/settlement agreements
1 min read
A compromise agreement (soon to be known as a settlement agreement) is a formal legal document whereby the employer and employee mutually agree to part company in return for financial settlement, and the employee agrees not to pursue any claim or grievance they may have in an employment tribunal.
Compromise agreements are recognised by statute and are the only way the employee can validly 'contract out' of their employment law rights.
Note that there are some claims that cannot be validly compromised. In particular, an employee cannot compromise a number of their rights under the Transfer of Undertakings (Protection of Employment ) Regulations 2006.
What should it contain?
For a compromise agreement to be a binding document, the following conditions must be observed and complied with:
- The agreement must be in writing
- It must relate to the particular complaint or proceedings
- The employee must have received advice from a relevant legal adviser about the content of the document and its effect on their ability to pursue a claim at tribunal (normally paid for by the employer and costs in the region of £250 + VAT).
- There must be a certificate of insurance in force for the adviser, or an indemnity certificate for members of a profession
- The agreement must identify who it was who gave the advice
- The agreement must specify that the above conditions have been met.
The risk in offering a compromise agreement is that the employer is effectively informing the employee that they no longer want them to work for the company, and the employee could potentially resign and claim constructive dismissal.
Forthcoming changes
This summer, the government will introduce legislative changes and a new statutory code of practice to encourage employers to use settlement agreements – the word 'compromise' will be dropped – where the employment relationship breaks down. The aim is to reduce the number of costly claims being taken to the Employment Tribunal.
