What is a compromise agreement?
A compromise agreement in the UK is a formal contract that is drawn up between an employer and an employee in agreement for the termination of their employment. (Compromise agreements in other countries may be different.)
The agreement is so named because it is made up of a ‘commitment’ of terms between the employer and the employee. It will normally include a compensatory payment and a list of termination clauses. These provisions ensure the finality of the agreement and prevent the employee from seeking further compensation in the future or taking any legal action.
Why would you want a compromise agreement?
A compromise agreement provides a solution to end an employment relationship amicably. Your employer has to comply with employment law, which means that he cannot simply ‘hire’ the rights of employees; a compromise agreement is the solution.
Once an agreement has been formed, the employee cannot file a compensation claim against the employer in employment court. Therefore, it is very important to get it right, and the best way to do this is to seek professional legal advice before agreeing to anything. An attorney experienced in this type of negotiation will ensure that you get a fair and agreeable settlement.
Who pays for a committed agreement?
Typically, an employer will cover the costs of creating the agreement and your attorney will bill them directly for the costs they have incurred. They typically cost between £250 and £300, depending on the complexity of the deal.
However, it is your responsibility to make sure the employer pays these costs; there is a possibility that additional work may need to be done, which will then be charged to you.
Is the content of a compromise agreement confidential?
The level of confidentiality varies from contract to contract. Some agreements will simply request that the employee not discuss the content with their co-workers. However, some will contain broad provisions that prevent either party from discussing the contract with third parties. The employer could even require that the existing agreement not be recognized.
Some agreements often contain clauses that prevent both parties from making derogatory comments to each other.
What if I don’t want to consent to the proposed settlement?
An employee has no legal obligation to sign a commitment agreement. If he does not sign the contract, he can file a claim in the labor court against his employer. However, he does note that a compromised settlement may have more favorable terms than a dismissal or court payment.
An experienced attorney will be able to negotiate the terms of the agreement on your behalf. They must ensure that he receives a fair and reasonable settlement from his employer that he is willing to consent to.
Do I have to pay taxes and national insurance on the compensation I receive under a compromise agreement?
An employee is entitled to receive a payment of up to £30,000, free of tax and national insurance. However, if the compensation money contains unpaid wages and vacation pay, then taxes and national insurance will be paid on this proportion.
If the agreement contains a PILON (payment in lieu of notice) clause, then HMRC will classify this as a salary payment and will be subject to tax and national insurance as usual.
The employer will normally seek to have a tax indemnity clause included in the contract. This means that in the event that any national tax and insurance is paid, then it becomes the responsibility of the employee to settle this payment with HMRC.
In any case, to ensure that your compromise agreement is binding, you should obtain independent legal advice in this regard; be sure to use employment law attorneys who specialize in compromise agreements. Please note that this article refers only to UK compromised deals; the laws of other countries vary.