Five Things About … Compromise Agreements

Five Things You Need to Know About…..Compromise Agreements

This week’s article concentrates on compromise agreements – as they are currently called. There are currently proposals from the government to introduce simplified versions called settlements agreements. A compromise agreement can be described in a nutshell – in exchange for a sum of money the person signing the agreement waives the right to pursue their employer for the employment claims listed in the agreement.
Compromise agreements are fairly common agreements these days and I am receiving more and more enquiries regarding them. Therefore detailed below are the key five things I believe you should know about compromise agreements:

1. Under a compromise agreement you are agreeing to waive the right to pursue your employer for all employment claims detailed in the document – this will usually be drafted by your employer’s solicitors to ensure that every possible legal right (in employment law) is included and waived by the signee. It is therefore crucial that you explain all the circumstances to your solicitor so he can evaluate whether it is worthwhile signing the agreement – or advise you not to sign the agreement if you have a claim that could be worth more money to you, if you pursued the claim rather than signing it away.

2. It is common place for your employer to pay a contribution towards your legal fees – the industry standard here is in the region of £250 + VAT. But one thing you should know – and this is rarely passed on by employers – if you do not sign the agreement following the advice from your solicitor – the company will not then have to pay (they only pay if the agreement is signed) and you will be responsible personally for the solicitors fees.

3. In order for a compromise agreement to be legally binding you must receive independent legal advice on the terms and effect of the agreement. It is usual for the solicitor to have to sign the document to show they have advised on the agreement.

4. If the agreement includes reference to a ‘ex-gratia payment’ (a payment the employer is not legally bound to make) or ‘compensation for loss of office’ (CFLO) then you can potentially have any sums, up to £30,000, paid to you without deduction of tax and National insurance.

5. Where employers are making a payment which is potentially tax free (as described in point 4 above) it is usual for a tax indemnity to be given in the agreement. This is effectively a clause which states that if any tax is payable on the ex gratia/CFLO payment then the employee is responsible for this. As long as the ex gratia/CFLO is a genuine payment it will not be taxable. However it is common for some companies to include contractual notice pay in the ex gratia/CFLO payment – in an attempt to avoid the employee paying tax on this sum to HMRC – and if this is the case then there is a realistic chance that if the HMRC investigate the circumstances of the agreement then tax will be payable by the employee.

If you have been offered a compromise agreement and require independent legal advice or are an employer and require a compromise agreement drafting for a specific employee then do not hesitate to get in touch with our Employment Team who will be able to fully advise you.