A compromise agreement, often referred to as a settlement agreement, is a legally binding agreement between an employer and employee. It is commonly used at the end of an employment relationship to settle a potential claim or dispute. This agreement is common in the UK, especially when an employer intends to terminate an employee, and believes there is a risk of a challenge to that dismissal at an employment tribunal.
A compromise agreement outlines the terms and conditions of the employee’s departure from the company, including any compensation they might be entitled to. The agreement typically contains provisions that restrict the employee's ability to make any future claims against the employer.
Usually, an employer will offer a compromise agreement to an employee with an explanation of the terms and conditions offered in the document. After receiving the agreement, an employee may choose to negotiate on some of the elements outlined in the document before signing.
The commencement of a negotiation is typically dependent on the value of the potential claim and the level of risk involved for the employer. Discussions between the employee and employer can be done directly or through third party legal advisors.
The most common elements found in UK compromise agreements include:
Termination Date
The agreement sets down the date when the employee’s employment with the employer will end. It can be a fixed date or immediate, depending on the circumstances. Usually, the agreement has a termination date once both parties have signed the document and agreed to the terms.
Compensation
The agreement outlines the amount of money an employee will receive as compensation for their departure. This may include any payments in lieu of notice, bonuses, redundancy payments or payment for unused holiday entitlement.
Confidentiality and Non-Disclosure
The agreement may require the employee to keep the contents of the agreement and the circumstances around their departure from the company confidential. This includes any trade secrets or sensitive company information the employee may have access to.
Restrictive Covenants
The agreement may include covenants which restrict the employee from taking certain actions or working for a competitor after leaving the company. The agreement may also include non-solicitation clauses ensuring that the employee cannot influence or lure clients, customers or employees from the company.
Tax Considerations
The agreement may include details of the tax implications related to the compensation or benefits provided to the employee. Often, employers provide a sum of money towards the cost of the employee obtaining independent legal advice to fulfil their obligations under the agreement.
Termination Payments and Benefits
The agreement outlines the terms and conditions under which the payment and benefits for the employee's departure from the company will be paid. This may include a payment in lieu of notice, annual leave payments, and a redundancy payment if applicable.
By signing a compromise agreement, both employee and employer agree to follow the terms outlined in the document. The agreement is a final settlement and prevents the employee from pursuing any legal action against the company related to employment or termination of employment.
In conclusion, a UK compromise agreement is a legally binding document that outlines the terms and conditions of an employee’s departure from a company. Typical elements include compensation, confidentiality, restrictive covenants, tax considerations, and termination payments and benefits. This agreement is essential in protecting the employer from future claims by employees and ensuring peace of mind for both parties.