When a dispute arises under a contract of employment, the only way that a settlement can be reached between the parties that is legally binding is by a Compromise Agreement.
This is also the only way in which an employer can legally make you sign away your legal rights and so it is vitally important for you to ensure that you are not signing away anything that you don’t want to.
WHY SHOULD I SIGN IT?
The effect of a Compromise Agreement will be that in return for the employee signing away all future rights to sue the employer, they will often receive payment in full and final settlement of a claim which is slightly more generous that that they are strictly entitled to under the law.
Alternative situations where Compromise Agreements are used, are for example where an employer is making redundancies and via this method they can offer an superior redundancy package which includes an ex-gratia (goodwill) payment in addition to what is required by law. Another example is it is used to settle claims in circumstances where the employer may have a claim against the employee.
However the employee needs to be aware that there may be some circumstances where there is no incentive for the employee to sign a Compromise agreement and in these circumstances, you need to consider whether you should in fact sign it.
WHAT SHOULD I LOOK OUT FOR?
Care must be taken when drafting Compromise Agreements to specify all of the possible claims that an employee is being asked to compromise. These will include claims under contract or under statute law. If the Compromise Agreement does not make this very clear it will not be in full and final settlement of all such claims.
It is also important that the Compromise Agreement is properly worded to deal with issues relating to continuing obligations such as confidentiality as well as more mundane ones such the return of a company car.
Whilst an Employer is not legally required to do so, the usual practice is to offer to make a contribution to the employee’s legal costs for taking such advice.
Compromise Agreements must be expressed as being "Without Prejudice and Subject to Contract" to prevent employees and employers referring to them if the dispute between the parties cannot be settled using a compromise agreement and proceeds to litigation.
TAX ON TERMINATION AND EX-GRATIA PAYMENTS
Careful consideration needs to be taken when entering into a compromise agreement as tax will be payable on elements of the payout which relates to money due under employment for example, payment of wages or holiday pay. However payments of up to £30,000 can be made tax free providing they are properly documented in the Compromise agreement and it does not relate to money that is owed under your employment.
