Is it possible to negotiate a compromise agreement ?

evolvedlegal
July 23, 2012

In short, the answer to the our question is yes – a compromise agreement is the form of settlement agreement used in employment law where employer and employee agree, mutually, that the employment relationship should end. Employers use these agreements as they provide finality, for almost everything which could otherwise result in a claim, with the exception of personal injury compensation claims.

Whilst compromise agreements have always been negotiable, and in fact the employee will generally expect a financial, ex gratia amount over and above contractual entitlements in order to sign up to such agreements, historically, the average compromise agreement did not involve, in reality, a huge scope for negotiating. Typically with these agreements the employer would offer 2-3 months equivalent salary, tax free, as the inducement to sign, and most employers would refuse to budge much, if at all, on that offer, regardless of the issues which have resulted in the parties deciding to go separate ways.

Why is this ?

Employment law is fundamentally about loss and not compensation (although compensation is awarded for discrimination). Consequently, if an employee gets a new job quickly, he or she, in the absence of a strong discrimination claim, can only claim contractual entitlements and the actual loss suffered. In a good job market, this would typically be 1-2 months or less. Worth remembering also that the employee has a duty to mitigate loss, and to be actively seeking suitable alternative employment.

The above explains why historically there has been something of a “going rate” for a compromise agreement ex gratia payment.

Things may well be changing with the job market now being very uncertain. Employers cannot be so confident that if they make a relatively low offer, the employee rejects it and proceeds with a claim, that the employee will quickly find alternative employment.

The result ? Both sides need to think more carefully about their negotiating position on compromise agreements and there may be more scope in certain situations, for a meaningful negotiation to take place.