UK Compromise Agreements – The Basics

What is a compromise agreement?

A compromise agreement in the UK is a formal contract that is drawn up between an employer and employee in settlement for termination of their employment. (Compromise agreements in other countries may be different.)

The agreement is thus called because it is made up of a ‘compromise’ of terms between the employer and employee. It will normally include a compensatory payment and a list of termination clauses. These provisions ensure the finality of the agreement and prevent the employee seeking further compensation in the future or bringing any legal action.

Why would I want a compromise agreement?

A compromise agreement provides a solution to ending an employment relationship amicably. Your employer has to abide with employment law which means that they cannot merely ‘contract out’ from providing employee rights – a compromise agreement is the solution.

After an agreement has been formed, the employee cannot bring a claim for compensation against the employer before an employment tribunal. It is therefore very important to get it right, and the best way to do this is to seek professional legal advice prior to agreeing anything. A solicitor experienced in this kind of negotiation will make sure that you obtain a fair and agreeable settlement.

Who pays for a compromise agreement?

Usually an employer will cover the costs of creating the agreement, and your solicitor will invoice them directly for the costs they have incurred. These usually work out at about £250 – £300 depending on the complexity of the agreement.

It is however, your responsibility to make sure that the employer pays these costs – there is the possibility that extra work will have to 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. The employer could even demand that no acknowledgment is made of the agreement existing.

Some agreements often contain clauses which prevent both parties from making depreciating comments about each other.

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 do not sign the contract then you are free to take up a claim with the employment tribunal against your employer. 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 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. Be aware that this article refers to UK compromise agreements only – laws in other countries vary.