What is a Compromise Agreement?

Employees may have claims against their employer under both their contract of employment and any relevant statute, and these claims may arise on recruitment, during employment or on termination. In many cases the employer will want to make a payment to the employee in return for an effective waiver of such claims.

A compromise agreement is a specific type of contract, regulated by statute, between an employer and its employee (or ex-employee) under which the employee receives a negotiated financial sum in exchange for agreeing that he or she will have no further claim against the employer as a result of any breach of a statutory obligation by the employer.

Except when ACAS have been involved and arranged a COT3 settlement, compromise agreements are the only means whereby an employee can waive statutory claims such as unfair dismissal, discrimination or redundancy. The agreement will only be valid where (i) it is in writing and (ii) the employee has received independent advice from a solicitor who has professional indemnity insurance. An employee cannot compromise potential future claims, though claims that have already arisen, unknown to the employee, can be waived.

In practice, a compromise agreement will also contain a waiver of any claim for breach of contract as well as statutory claims, though such a waiver does not need to satisfy the same requirements in order to be valid.

Each agreement must be tailored to meet the facts and circumstances of the case. It is therefore impossible to adopt a one size fits all approach to drafting of a compromise agreement.

The advantage for the employer is that they are able to draw a line under an employee's departure and feel protected from future claims. The advantage for the employee is the financial sum received in return.

Employers are now increasingly using compromise agreements as a mechanism for preventing possible future complaints to a tribunal, especially in redundancy situations.

Conditions

For a compromise agreement to be valid certain conditions must be met:

• The agreement must be in writing.
• The agreement must relate to a "particular complaint" or "particular proceedings".
• The employee must have received legal advice from a relevant independent advisor on the terms and effect of the proposed agreement and its effect on the employee's ability to pursue any rights before an employment tribunal.
• The independent advisor must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.
• The agreement must identify the advisor.
• The agreement must state that the conditions regulating compromise agreements have been satisfied.

Particular complaint or proceedings

The compromise agreement must relate to:

• A "particular complaint" (in respect of claims under the Equal Pay Act 1970, Sex Discrimination Act 1975, Race Relations Act 1976, Employment Relations Act 1999, Disability Discrimination Act 1995, Working Time Regulations 1998, Employment Equality (Sexual Orientation) Regulations 2003, Employment Equality (Religion or Belief) Regulations 2003 and Employment Equality (Age) Regulations 2006); or
• "Particular proceedings" (in respect of claims under the Trade Union and Labour Relations (Consolidation) Act 1992, Employment Rights Act 1996 (ERA 1996), National Minimum Wage Act 1998, Transnational Information and Consultation of Employees Regulations 1999, Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations 2000, Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000, Information and Consultation of Employees Regulations 2004), Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 and Companies (Cross-Border Mergers) Regulations 2007.
  

Where the employee has raised a number of claims, they can all be settled in a single compromise agreement.

It is also possible to enter into a compromise agreement prior to the employee commencing tribunal proceedings.

A compromise agreement cannot try to waive claims that have not yet arisen. However this can be done where the settlement is drawn up with the assistance of an ACAS conciliation officer.

Furthermore, it is not possible to compromise:

• Claims for failure to inform and consult with appropriate representatives on collective redundancies.  However it is possible to compromise the employee's right to bring a claim for failure to pay a protective award under section 192 of TULRCA.
• It appears that it is not possible to compromise claims for failure to inform and consult or failure to pay the compensation that is equivalent to the protective award under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006).
  

Claims that the parties have no knowledge of are potentially within the scope of a compromise agreement provided the wording is sufficiently explicit. However, general waivers of all statutory claims or all future claims would not be effective.

Many employers still include a "catch all" waiver of claims, which is unlikely to be a problem in itself, as long as the employer is aware that the current view of the courts and tribunals is that such a waiver would not be effective.

Ideally the employee's advisor would specify the potential claims, but this may be hard to achieve in practice. Therefore the employer's advisor should identify the potential claims after detailed discussion with the employer. There is a risk that if the employer includes an extensive list of claims (without good basis) a court or tribunal could find that it was merely a general list and did not satisfy the statutory requirements.

The difficulty is deciding how much information on each potential claim to include. There is a danger that a description of the complaint is subsequently found to be incomplete or incorrect. It may therefore be safer to simply identify the legal basis for the claim (for example, unfair dismissal) without going into details of the basis of such a claim.

Independent legal advisor

For a compromise agreement to be effective, the employee must have received independent legal advice (there is no equivalent requirement that the employer has obtained legal advice). At present, four types of advisor fall within the definition of independent legal advisor:

• Qualified lawyers (which in England and Wales mean barristers, solicitors and "authorised advocates" or "authorised litigators" (sections 27, 28 and 119, the Courts and Legal Services Act 1990)).
• Officers, officials, employees or members of an independent trade union who have been certified by the union as competent to give advice and are authorised to do so on its behalf.
• Those working at an advice centre (whether as an employee or a volunteer) who have been certified as competent to give advice and are authorised to do so on its behalf, provided the employee has not paid for the advice.
• Those specified in any order made by the Secretary of State. This covers Fellows of the Institute of Legal Executives employed by a solicitors' practice (the Compromise Agreements (Description of Person) Order 2004, as amended by the Compromise Agreements (Description of Person) Order 2004 (Amendment) Order 2004).
  

In 2008 BERR (now BIS) had considered whether to extend the definition of independent legal advisor to include qualified HR professionals, among others. However, after consultation, it declined to do so.

In addition, to ensure that the advice given is truly independent, the advisor must not be:

• The respondent (or potential respondent).
• Employed by the respondent (or potential respondent) or its associated employers.
• Acting for the respondent (or potential respondent) or its associated employers.
  

It is also possible for the employee to acknowledge in the compromise agreement that they have received independent legal advice.

Employee warranties

It is common practice for warranties from the employee to be included in a compromise agreement. These usually cover the return of the employer's property, confidential information and documents relating to its business and confirmation that the employee has not received an offer of employment prior to entering the compromise agreement.

Employees are also frequently required to warrant that they have not committed any repudiatory breaches of their contract of employment (which would have entitled the employer to terminate their employment without notice or payment in lieu of notice).

It may also be appropriate to include:

• A warranty from the employee confirming that the claims listed are the only claims that they have and a statement that the employer has relied on the warranty in entering into the agreement.
• A provision entitling the employer to withhold part of the termination payment for at least three months and only pay that remaining part of the payment if the employee has not brought any claims against the employer.
• A requirement to repay the termination payment if the employee brings a claim. There is, however, a danger that such an obligation to repay will be held to be void as a penalty.
  

Enforcement of a compromise agreement

Where there is a breach of a compromise agreement it can be enforced:

• By way of a claim for breach of contract in the civil courts.
• As a contract claim in an employment tribunal, provided the compromise agreement is made before termination.