Why compromise agreements benefit both employers and employees?

A 'Compromise Agreement' (also known as a severance agreement or redundancy agreement) is recognised by statute as the only way any claims arising out of an employee's employment or its termination can be validly settled without Tribunal proceedings being initiated.

The benefit to employers of getting a Compromise Agreement is that it settles any existing dispute and prevents future claims to a Tribunal in all employment situations. It is particularly useful in redundancy situations where, if an employer does not comply with the law in making redundancies (perhaps through failing to consult properly, failing to use fair selection criteria etc), an employee can complain to a Tribunal that the redundancy was unfair. This can be done after the redundancy and could result in an award of compensation or even reinstatement.

The advantage to employees of entering a Compromise Agreement is that they are guaranteed an amount in addition to the statutory minimum redundancy payment and contractual notice entitlements as an inducement to sign up. Also, it is much quicker and less stressful than pursuing a claim in an Employment Tribunal, and avoids the risk of the claim being unsuccessful.

The law, however, does not allow employees to contract out of their employment rights, except in specified circumstances.

A simple agreement in writing by both parties will therefore have no binding effect; a formally drafted Compromise Agreement (which has to satisfy certain requirements) is necessary. In addition, the law states that a Compromise Agreement is only valid if an employee has had legal advice on it. Because Compromise Agreements can be written in a very legalistic language and can refer to Acts and Regulations which employees may never have heard of, the employees will have to be advised on the meaning and effect of the Compromise Agreement so that they fully understand the legal issues. They will also need to be advised on any potential claims, what those claims might be worth, whether the compensation offered is reasonable in the circumstances and whether the Compromise Agreement needs to be amended or negotiated.

At Rowberry Morris, we know that a Compromise Agreement is something both sides wish to be dealt with as quickly as possible.  Early advice to employers will prevent their falling into some very difficult traps when offering Compromise Agreements and we can guide them through the position regarding tax on severance payments, which is not always straightforward. When acting for employees, we will always aim to offer advice on the Compromise Agreement as soon as we have the information we need and, if the agreement is straightforward, we can even advise on the same day it is sent to us.