The hazards of compromise agreements – what employees should be aware of

Direct 2 Lawyers
October 3, 2012

If you’re considering entering into a compromise agreement this will waive your rights to any unfair dismissal, constructive dismissal or discrimination claim you may have (among other claims). You’ve therefore got to be careful about not undervaluing any agreement and should obtain the best legal advice possible in the circumstances. If you’re entering into a compromise agreement then your employer has a legal duty to inform you that you should obtain independent legal advice on your compromise agreement and will normally pay a sum towards your obtaining such advice (between £250 and £350 usually). However, there’s no harm in learning a little yourself about compromise agreements and this post will attempt to present employees with a (non-exhaustive) list of potential hazards in compromise agreements. This subject is also dealt with in this post on the pitfalls of compromise agreements. This article will look at the following issues:

What is a compromise agreement?
When might I need a compromise agreement?
What are the potential hazards of compromise agreements?

What is a compromise agreement?

A compromise agreement is a written agreement which relates to the employee’s (potential) claims against their employer. It’s normal for such agreements to be used prior to any Employment Tribunal proceedings and on the termination of the employee’ employment with their employer. This limits the liability of the employer to any claim and gives both parties certainty as to their future conduct. Under the Employment Rights Act 1996 a compromise agreement must (among other things):

Be in writing;
Relate to particular, clearly identified proceedings
Have been drafted and advised on by an independent legal adviser (who has a contract of insurance for indemnity)

When might I need a compromise agreement?

If you’re entering into a compromise agreement then it means that your employment with your employer is probably terminating. This doesn’t have to be the case – you could, for example, compromise a discrimination claim without leaving your employment. However, compromise agreements normally act as a “guillotine” to prevent former employees from pursuing their employer for unfair dismissal. Compromise agreements, however, waive an employee’s rights to pursue a wide range of claims, including discrimination, unfair dismissal, harassment, constructive dismissal, unlawful deductions from wages, victimisation etc.

What are the potential hazards of compromise agreements?

The potential hazards of compromise agreements are numerous, which is why employees have to obtain independent legal advice on them! You should try and get this advice from a specialist employment lawyer – someone who knows the subject inside out. See this post for a run-down on what you should ask a compromise agreement solicitor before instructing them. Potential problems in a compromise agreement include complexities with tax arrangements in particular situations (although compromise agreements upon termination of employment are generally tax-free up to £30,000); breaches of restrictive covenants; potentially complex compromise agreements where you have to pay a large amount of money for extra legal advice; and a failure to include a suitable reference in the agreement. This is, again, a non-exhaustive list but it is something that employees should consider when looking at their compromise agreement and considering instructing solicitors.

Direct 2 Lawyers offer free employment law advice for employers and free employment law advice for employees. They specialist employment lawyers they use offer employment law advice, compromise agreement advice and are specialist unfair dismissal solicitors.