Compromise agreements: 10 essential factors to consider when entering into a compromise agreement

Redmans Solicitors
July 31, 2012

If you’ve been offered a compromise agreement then it can be a stressful time for you. You’ll want to get the best advice possible on your agreement to make sure that you’re covering all your bases and aren’t being short-changed for giving up your rights. This post therefore offers some advice on what you should look for if you’ve got a compromise agreement and what you should ask your compromise agreement solicitor or your employer.

1. Are you happy with the value of the settlement?

Most compromise agreements involve situations where an employee has either resigned (or will resign) from their job or has been (or is being) dismissed from their job. The compromise agreement is therefore a means for an employer to limit their liability to an employee and to have certainty as to what’s going to happen after the contract of employment comes to an end. For the employee it’s a means of achieving a measure of financial security without resorting to the stress and cost of litigation. However, you’ve got to be sure that the compromise agreement is settling your potential claim for a reasonable amount – and that’s why you need legal advice.

The value of your compromise agreement should be based upon a calculation of how much you would receive should you take your claim to the Employment Tribunal (or through the civil courts), suitably discounted to reflect the removal of litigation risk (the chances of you losing your claim) and the cost of going to the Tribunal. You should therefore get advice on:

The potential “full” value of your claim(s)
The probability that your solicitor believes your claim would succeed
How much it would cost you to take your case to the Employment Tribunal

Using this information you will then be in a position to make a reasonable evaluation of roughly how much your claim is worth.

2. Do you want or need a reference?

This is quite important in claims involving unfair dismissal. If you’re leaving your job then you’ll want an agreed reference from your (previous) employer included in your compromise agreement. Although this doesn’t completely protect your position (i.e. your employer could provide a written reference but “slag you off” behind your back to a potential employer) it means that you’re in a relatively stronger position to find new employment. However, be aware that most employment references given now are purely “factual” in nature and will frequently only cover how long you’ve worked there for and give a description of your job.

3. How much is your (previous) employer willing to pay for your legal advice?

Again, an important consideration. Make sure that your employer is willing to pay a reasonable amount for the legal advice you’re being given or you could (literally) end up paying for it. A “reasonable” amount (although it really depends on the complexity and nature of the compromise agreement) is generally between £300 and £500.

4. How much is your solicitor going to charge you to advise on your compromise agreement?

This is one of the first things that you should ask a solicitor that you’re considering instructing (closely following “are you a solicitor?” and “do you have considerable experience with compromise agreements?”). Make sure that you get written confirmation from the solicitor of their hourly fees and how much they think advising on the compromise agreement will cost you. Try and get them to agree to accept the fixed fee from the employer as the maximum they’ll charge – this means that generally there’ll be no cost to you for the advice.

5. What would your claims in the Employment Tribunal be for?

Your solicitor will advise you on this. It’s often clear what the claim is for if it involves you leaving your employment (unfair dismissal or constructive dismissal, depending on the circumstances) but the analysis of discrimination claims can be more complicated.

6. How much would your claims in the Employment Tribunal potentially be worth?

Again, your solicitor should advise you on this. Make sure your compromise agreement solicitor provides you with a breakdown of what they think each aspect of your claim is worth. Bear in mind that claims in the Employment Tribunal (and in the courts generally) are never worth as much as you’d like them to be. Acting in a reasonable manner as regards compensation for losing your job (if that’s what has happened) can be difficult but it will make your life and your compromise agreement solicitor’s life that much easier.

7. How strong is your potential employment law claim?

Your compromise agreement solicitor will let you know how strong he (or she) thinks your employment law claim is. This will normally be a rule of thumb judgment – assessing the strength of a claim is an art, not a science, and this is particularly so when the compromise agreement solicitor has only had a very short time to consider the claim (and hasn’t had a chance to see the employer’s evidence).

8. How much would it cost to take the claim to the Employment Tribunal?

A lot of solicitors take Employment Tribunal cases on on a “no win no fee” basis (also known as a contingency fee agreement, or a damages based agreement). You should find out whether your compromise agreement solicitor would be willing to take your case on a no win no fee basis if you were forced to go to the Employment Tribunal. Otherwise it can get quite costly.

9. Are there any new restrictive covenants in your compromise agreement?

This is important – restrictive covenants will stop you acting as you like as regards your future job after you’ve left your employer. If there are new restrictive covenants then make sure you’re getting paid adequately for them or you could suffer the consequences!

10. Will I have to pay any tax on my compromise agreement?

The position relating to taxation is relatively complicated (any compromise agreement solicitor worth their salt will tell you this) but if the compromise agreement involves the termination of your employment then the first £30,000 will generally be tax free. If your compromise agreement involves large sums of money (over £30,000) then you may need to take specialist advice from a tax lawyer as well as your compromise agreement solicitor.

Redmans Solicitors are London employment lawyers with employment solicitors in Hounslow. They are specialist unfair dismissal solicitors