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Free EnquiryWhat Is A Compromise Agreement?

A ‘Compromise agreement’ is the legal term given to a termination agreement between an employer and an employee. They are aptly named for in signing a compromise agreement you will, in exchange for a negotiated sum of money, be giving up most of your employment-related legal rights.

Once you have signed one of these agreements, you then have no possible recourse in situations such as unfair or wrongful dismissal, discrimination claims, breach of contract claims, and claims for unlawful deduction from wages or claims for annual leave. Generally, the only claims that are exempt from compromise agreements are personal injury claims and accrued pension rights, although even in these instances they are not always exempt from the effects of a compromise agreement. It is up to the employee to decide whether or not to sign a compromise agreement. Should an employee decide they have grounds for a potential claim against their employer, they need to give serious consideration as to whether to sign or not and, if they do, make sure they are fully aware of the levels of compensation that are available to them.

If an employee signs a compromise agreement, they must be familiar with its terms. There are legal provisions that, if the employee does not observe them, can give the employer the right to recoup any monies they have paid out. Terms to be observed in a compromise agreement might include the return of any items of company property within a set period of time, a confidentiality clause regarding the signing of the agreement and the amount of compensation received. It could also include the requirement that the employee does not try and attract any of his former employer’s customers, staff or suppliers and that the employee does not start a business that is in competition with his former employer.

Although the compromise agreement seems to favour the employer, it does offer the employee certain benefits, especially in terms of the payout. As long as the circumstances of the termination and the terms of the agreement reach certain criteria, it is possible to treat up to £30,000 of the compromise agreement payout as non-taxable. In legal terms, this is to compensate the employee for the loss of the right to employed in the future. In addition, many compromise agreements contain a ‘Payment In Lieu Of Notice’ (PILON) clause, which allows a payment to be made in the case that the employer does not want the employee to work out their period of notice.

In order for a compromise agreement to be legally binding, it is crucial that an employee receives legal advice from a lawyer or other appropriately qualified advisor. This is to ensure that the employee fully understands what his entitlements are and also the legal rights that they have waived by the signing of a compromise agreement. To ensure that this is taken up, many employers will contribute a nominal sum to the cost of an employee’s legal costs.

While compromise agreements can appear complicated, they can work for both parties involved, saving both time and money. However, they are not to be entered into lightly and the employee must fully understand the agreement into which he is entering.

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"Faced with a complex industrial dispute involving three parties, Callander Golf Club called on the expertise of The Work Ethic to help resolve the situation. Sound legal advice backed by high-level negotiating skills led to an out-of-court settlement to the satisfaction of the Firm’s clients."

J Morrison, Callander Golf Club

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