Compromise Agreements

This checklist sets out the key issues your business should consider before entering into a compromise agreement with an employee.

In what circumstances will a compromise agreement be appropriate?

  • An employee can make a claim against your business under both their contract of employment and under statute. These claims may arise:
    • when they are hired by your business
    • during employment; or
    • when their employment has been terminated.
  • In many cases, you may want to make a payment to an employee in return for an effective waiver of their claim. You can enter into an agreement with your employee to settle a claim when they are still working for you, but in most situations, their employment will have ended (or be about to).
  • One method of reaching an agreement to settle a statutory claim is to enter into a compromise agreement with your employee. Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Unlike contractual claims, which can be waived by entering into a contractual waiver of such claims, statutory claims can only be waived in prescribed ways, one of which is by means of a compromise agreement Although it is usual for compromise agreements to be entered into where employment has terminated (or is about to terminate), it is possible to enter into one where employment is continuing. Unlike contractual claims, which can be waived by entering into a contractual waiver of such claims, statutory claims can only be waived in prescribed ways, one of which is by means of a compromise agreementA compromise agreement is a binding agreement between your business and an employee to either:
    • settle a case; or
    • refrain from starting or continuing a claim.

What are the legal requirements for a valid compromise agreement?

For a compromise agreement to be valid, there a number of conditions that must be met:

  • The agreement must be in writing.
  • The agreement must relate to a particular complaint or particular proceedings.
  • Your employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official) on:
    • the terms and effect of the proposed agreement; and
    • its effect on their ability to pursue any rights before an employment tribunal.
  • The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by your employee for the advice.
  • The individual that provided your employee with the advice must be identified.

Possible content of a compromise agreement

Other than the legal requirements listed above, the contents of a compromise agreement are largely at the discretion of your business and the employee involved. However, as the protection of confidential information is usually very important to a business, agreements often contain confidentiality provisions. These could include the employee agreeing:

  • Not to use any confidential information.
  • Not to disclose any confidential information to any person, company or other organisation.
  • To keep the terms and existence of the agreement confidential.
  • To not make any derogatory comments about the employer or any individuals employed by it to a third party.

Which types of claim can be settled by a compromise agreement?

A large number of statutory claims can be settled by a compromise agreement, for example claims for:

  • Unfair dismissal.
  • Pregnancy or maternity-related discrimination.
  • Discrimination, victimisation or harassment related to sexual orientation.

Which types of claim cannot be settled by a compromise agreement?

There are a number of statutory claims that cannot be settled by entering into a compromise agreement, including some types of:

  • Personal injury claims.
  • Pension claims.

More information

If you have any questions about the content of this checklist, or for full details of whether a statutory claim can be settled by a compromise agreement, take a look at the Comprimise Agreement page on our website.