FAQs about Compromise Agreements

EMPLOYMENT SOLICITOR IN CAMDEN

The main reasons employees commonly sign compromise agreements are:

  • The employee generally receives an enhanced ex gratia or compensatory amount in addition to being paid contractual notice money
  • The odds are generally in favour of the Employer under English law for Employment Tribunal claims. Pursuing a dispute in the Employment Tribunal is risky, takes many months and is expensive if a lawyer is used
  • Employment law, like English law generally, is predominantly loss rather than compensation based. Even if an employee has a strong claim to have been unfairly dismissed, over and above contractual entitlements, the employee will generally have to be unable to secure employment for 3-4 months to make rejecting compromise agreement worthwhile
  • The employee will generally not be required to work his or her notice period, and will be paid all sums, including contractual notice and ex gratia amount upfront
  • -The employee will generally be free to seek another job immediately

The essence of a Compromise Agreement is that:

  • The employee contractually agrees to terminate the employment relationship and not to bring any claims (subject to 2 exceptions – see below) against the employer, whether arising under the contract, English or European law
  • In return, the employer generally pays up the employee’s notice period, the employee is not required to work the notice period and the employee receives a further ex gratia or compensatory payment as an inducement to sign the Agreement and waive any available claims

The employee cannot be asked to and in fact cannot agree to, waive (contract out) in the Compromise Agreement of a possible claim for personal injury claim which neither the employer or employee are aware of. An example of this is asbestosis, which often takes many years to develop. The other main area is pensions. The employee cannot contract out of any pension rights.

My employer says I must go home for my notice period – do I have to comply?

Your contract may include what is often called a “gardening leave” clause, in which case you will have to abide by it. But if your employer has not included such a clause then technically he has no right to tell you not to come to work. In any case, if your contract does not have a gardening leave clause payment in lieu of notice may well be tax free if your gardening leave covers your notice period. If you accept that you will be leaving your employment one way or the other the complicated issues of what payments are taxable, and what you may do after the end of your employment, are best set out in a Compromise Agreement.

What is the tax position on payments made to me?

In general terms, any payment which an employer is contractually bound to make to an employer results in the employer being legally obliged to make appropriate deductions before payment to the employee. This generally means that payment for your notice period and holiday pay and potentially other entitlements may need to be taxed before payment to you.

There is an exception to this which sometimes applies to a Payment in lieu of notice (PILON). If your employment contract has a clause allowing the Employer to pay you in lieu of notice, then this payment must be taxed, as it is included in the contract. If the contract is silent as to this option, and in practice, which is typical of compromise agreements, the employer does not require the employee to work notice, this payment can be tax free, as it is not a contractual payment under law.

The ex gratia payment part of the overall financial package is not a contractual entitlement and is generally payable tax free up to a maximum of £30,000.00.

Compromise Agreements typically include a clause known as the Indemnity Clause, which states that if the Inland Revenue challenge part or all of the payment as taxable (where the Employer has not deducted tax on part or all of the overall payment), and force the Employer to pay tax, the employer can then pursue the employee for tax then paid. In relation to this clause, whilst no lawyer can offer the employee a ”cast iron guarantee” that no such claim will be made by the Inland Revenue and then by the employer, this is very unlikely in our experience. If you remain concerned about this point, please ask us to explain further.

Why are compromise agreements used in redundancy situations?

Compromise agreements are being increasingly used by employers in redundancy situations as a mechanism for preventing any future claims arising out of the redundancy.  For employers compromise agreements are a useful tool, especially if they have not fully or fairly complied with redundancy procedures. However they can still be used even where the redundancy is fair to give the employer a clean break between you and them. Remember by signing the compromise agreement the employee agrees that there is a ‘full and final’ settlement of all claims against the employer.

Can I/should I negotiate on the terms offered in the Compromise Agreement?

There are 2 aspects to this question, being:

As the Agreements are statutory and generally quite standardised (in order to make the Compromise Agreement valid and legally binding, it must include the vast majority of content included) there are few aspects of the wording which need to be changed/negotiated and/or which the Employer will generally agree to amend and/or delete

It is not unusual to seek to negotiate on the ex gratia payment, particularly if the employee has been offered an amount at the lower end of the likely range of ex gratia amounts.

What next ?