What terms should your compromise agreement include?

If you’ve been offered a compromise agreement then you should be advised that you have to obtain independent legal advice from a “relevant legal adviser” (a solicitor or a barrister). However, it’s only natural that you’ll want to learn about what a compromise agreement is and what terms it should include first. This post aims to introduce employees to five terms that a compromise agreement should include. If you want to read more you can find at the following link a useful summary of what the best compromise agreement solicitors should do for you.

The following terms should be included in almost all compromise agreements:

  1. An “all claims” clause
  2. An “entire agreement” clause
  3. A clause relating to the tax treatment of compromise agreements
  4. A breakdown of what you will be paid under the compromise agreement
  5. A “non-disparagement” clause

An “all claims” clause

Your compromise agreement can’t simply state that your agreement is waiving all your potential common law and statutory claims against your employer – it must contain a specific reference to each and all of the claims that you’re compromising by entering into the agreement. This includes, for example, your right to claim unfair dismissal, discrimination, unlawful deduction from wages etc. The number of claims that the compromise agreement claims you’re waiving will depend on how the compromise agreement is structured but it’s normally in the range of 30 – 40 claims.

An “entire agreement” clause

A compromise agreement is a contractual document – you’re promising not to pursue a claim against your employer in return for the payment of contractual and non-contractual benefits (normally a sum of money). In the compromise agreement (normally at the end) there should be a clause stating that the terms of the agreement are solely contained within the agreement itself and not in any other document.

A clause relating to the tax treatment of compromise agreements

This is very important. The first £30,000 of a payment made relating to the termination of your contract of employment is tax-free. However, contractual benefits (such as your notice pay, accrued holiday pay and any other contractual entitlement) will be subject to the relevant tax and National Insurance payments. You should query with your employer which payments are subject to tax and which are not and see if you can restructure the agreement to minimise your tax liability.

A breakdown of what you will be paid under the compromise agreement

This is important for a number of reasons:

  1. It allows your legal adviser to determine what you’re being paid for compromising your claims
  2. It allows you to gain an understanding of how much tax will be payable under the compromise agreement

If your compromise agreement simply specified a lump sum (without a breakdown) of what will be paid then it’s recommended that you query this.

A “non-disparagement” clause

This clause essentially is a warranty made by (normally) both parties, where they’re warranting that they will not make disparaging or derogatory remarks about the other party after the employment relationship terminates. This is common sense anyway but sometimes people (unwisely) let their emotions get the better of them.