If you have had a dispute with your employer, you may have been offered a compromise agreement. Alternatively, as an employer you may be considering offering your employer one as to resolve an employment dispute.
This is a detailed guide on compromise agreements, now known as settlement agreements, in the UK. It aims to educate readers on the legal intricacies, benefits, and critical considerations associated with these commercial agreements.
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What is a compromise agreement?
A settlement agreement is an agreement that ends claims or disputes between employers and employees that arise during an employee’s service, such as an employee’s contract being terminated.
Disputes may revolve around breach of contract, unfair dismissal, or discrimination.
A signed settlement agreement prevents an employee from bringing a claim against their employer.
Settlement agreements are legally binding, and in exchange for giving up their rights to bring an unfair dismissal claim, employees are typically given a compensation payout.
In 2013, the then compromise agreement was renamed to settlement agreement, due to legislative changes.
The Enterprise and Regulatory Reform Act 2013 was responsible for the change. This wasn’t only a change of name, other elements of the law on compromise agreements were changed too.
These included allowing employers and employees to have protected conversations to reach a decision about the terms and scope of an agreement.
Compromise agreement is often used interchangeably with the new term settlement agreement.
Is a compromise agreement legally binding?
Yes, a settlement agreement is a legally binding contract by statute. It is often drafted by solicitors. A compromise agreement may be drafted for an employee, or someone who has already left a business.
Compromise agreements and UK law
Settlement agreements are only binding if they state that the employee has received independent legal advice from a qualified lawyer, or trade union representative. Whichever adviser an employee uses, they must ensure that the employee understands the terms and implications of an agreement before they sign. An employee’s advisor has to sign the agreement to certify that they have given independent advice and that they are not acting for the employer.
Statutory requirements for a valid compromise agreement include:
What should be included in a compromise agreement?
A settlement agreement needs to include a number of clauses.
It should address compensation and financial terms. When considering the tax treatment of payments, the first £30,000 is tax-free.
If you don’t decide to sign a settlement agreement your employer will likely only pay you your minimum statutory entitlement, this includes notice pay, holiday pay and statutory redundancy pay.
Confidentiality and non-disparagement clauses should be included. Confidentiality clauses can prevent employees or employers from talking about the settlement or dispute publicly. Additionally, employees may be restricted from working with competitors, ex-customers, or clients after you leave.
When all of these clauses are included, the settlement agreement is intended to settle all current and future claims that the employee has against the employer and their colleagues.
An entire agreement clause clarifies that the agreement between the parties is what is stated in the written contract. It prevents the parties from raising claims that statements made during contractual negotiations should be included as additional terms of the agreement.
Reference provisions can be included to give employees a right to a job reference as part of their settlement agreement.
Who pays the legal costs for a compromise agreement?
Typically, legal fees for settlement agreements are covered by employers.
Employers' contributions toward solicitor fees vary but usually range from £200 to £500 plus VAT. If solicitor fees exceed this, they may request additional payment from the employer.
Remember, that if you decide to negotiate with your employer the costs of legal support may outweigh the settlement agreement limit and not be covered.
We’ve written a guide on the average legal costs of settlement agreements where you can learn more.
How to negotiate a compromise agreement
Approaching your employer about a settlement agreement can be sensitive. However, you have the power to negotiate an agreement that suits you.
Understanding your leverage for potential claims is important. Consider these questions: ‘Could you take your employer to a tribunal?’, ‘How strong is your claim?’, and ‘how much could you potentially win at a tribunal?’. Then consider the risk that litigation may fail, use this risk level to inform the settlement value you’d be happy with.
There are some proven strategies you can use to negotiate better terms. Using leverage if you have any is crucial to negotiating better settlement agreements. If you don’t have any and your employer proposes paying you the statutory minimum, you could appeal to their goodwill. They may be willing to pay you more in order to smooth over the transition of your job loss.
You might reference:
How much you have contributed to the business
The situation you will be put in by losing your job
Any sacrifices you have made to your personal life that benefitted the company
Not every settlement will be fair, you’ll need to know when to consider rejecting or renegotiating an agreement.
If you’re considering making a counteroffer, your first step should be seeking legal advice. A solicitor can advise you on the amount of compensation you’re entitled to in your settlement agreement and let you know if the settlement is fair and reasonable or whether you could make a counter offer for a higher amount.
When to use a compromise agreement
Settlement agreements are used in a few different scenarios, including dispute resolution as mentioned.
They are also used commonly in redundancy. Employers will often offer employees redundancy settlement agreements to sign when they have selected an employee for redundancy. You don’t have to sign a settlement agreement, if you do your employer is entitled to only pay your minimum statutory entitlement.
Employers may use settlement agreements when they haven’t followed the correct legal redundancy procedure. This can be the case when employers don’t follow fair selection criteria, fail to consult with employees about the redundancy process, or fail to consider alternatives to redundancy.
We’ve written a guide on how to spot a bad redundancy settlement agreement to empower you to fight for the best agreement you can get.
Pros and cons of settlement agreements for employers:
Pros | Cons |
Cost-effective solution | Could be a higher settlement than litigation |
Confidentiality | Can set precedents for other employees |
Control over outcome | Can imply guilt |
Time-saving | Can be difficult to enforce |
Pros and cons of settlement agreements for employees:
Pros | Cons |
Less upheaval than litigation | You cannot pursue the case in a tribunal when you accept a settlement |
Certainty – claims at tribunals can be dismissed | Confidentiality |
Tax benefits | Does not force employer to act differently in the future |
Can include a reference in the agreement | |
Legal consequences of breaching a compromise agreement
If either party can prove the other breached the agreement, any losses and related costs could be claimed for.
An example of a breach would be the employer failing to make the settlement payment.
What happens if I refuse to sign the agreement?
Settlement agreements are voluntary. You don’t have to sign an agreement that your employer has extended to you if you don’t agree with it.
If the agreement is not signed it is not valid. This allows you to continue any legal claims against your employer.
You would still remain employed by your employer and you can decide whether you want to stay or look for a new job. Your employer might decide to end your employment through a disciplinary procedure or capability process.
Are there claims that can’t be settled with a compromise agreement?
Yes, some employment claims can’t be settled by a settlement agreement.
They include:
What legal advice am I entitled to when offered a compromise agreement?
Usually, when you employ a solicitor to help with a settlement agreement they will:
Review the terms of the agreement
Explain the agreement to you
Offer professional advice on whether the agreement is fair and reasonable, or if you could negotiate for more compensation
Explain the consequences of accepting the agreement, including any tax implications
Why choose Lawhive
At Lawhive we offer a free case assessment where our expert settlement agreement solicitors will help review your agreement.
We charge fixed fees for legal assistance with settlement agreements and there no hidden fees to worry about. This means you know what you’re paying upfront, which isn’t always the case with traditional law firms.
Legal services for compromise agreements
It’s important to get legal support for a settlement agreement to ensure you get a fair agreement.
We are upfront about our fees so you won’t get any nasty surprises.
Contact Lawhive today for expert advice and discuss your specific needs in a free case assessment.