In this month’s article we will explore Compromise Agreements in the Workplace, when they might be used and what the process looks like.
A Compromise Agreement is a legally binding contract used to end an employment relationship on agreed terms, and settlement of all claims which may arise from the employment relationship (excluding a short list of exceptions – See Q6).
A Compromise Agreement is one of two ways in Northern Ireland by which a binding agreement can be reached so as to preclude that person being able to bring a claim in the Tribunal. The other way is through a Conciliated Agreement (either employer-led or early conciliations processes) with the Labour Relations Agency.
In return for employees signing a Compromise Agreement and waving their legal rights (for example, being able to claim for unfair dismissal) employees are usually given a compensatory lump sum payment.
As Compromise Agreements are known as Settlement Agreements in Great Britain, Great Britain based employers may refer to offering employees in Northern Ireland a Settlement Agreement rather than a Compromise Agreement.
Remember – Compromise agreements are voluntary and employees do not have to sign an agreement if they do not accept the terms. If not signed, the agreement is invalid and the employee is able to bring or continue any potential legal claim against their employer. They would remain employed and the employer may consider ending the employment by an alternative means, such as by following a disciplinary procedure or capability process.
Compromise agreements remain one of the most effective tools for achieving a clean, amicable and low-risk exit. For employers, the focus is often on reaching a resolution that protects the business, avoids future claims and allows both parties to move forward with certainty.
There isn’t one single reason why these agreements are used. In practice, they are offered in a range of situations, including:
These agreements are commonly used in situations where disputes have arisen and the employee and employer relationship has broken down, or in voluntary redundancy situations.
However, Compromise agreements are not always the best way to settle a dispute or deal with problems at work.
Before offering a Compromise agreement, employers should consider:
Whilst a Compromise agreement can be specifically drafted to include particular restrictions, perhaps related to notice period or post-employment, all agreements will generally include:
For a Compromise agreement to be legally valid, it must meet all of the below conditions; it must:
As detailed above, for the agreement to be legally enforceable, employees must have obtained independent legal advice. This ensures that employees fully understand the terms and implications of the agreement.
An agreement normally includes a clause where the employer pays a legal fee contribution, often between £250 and £750 + VAT. (Some employers offer more depending on the complexity of the agreement or the seniority of the employee)
This contribution usually covers:
Generally, this is one short appointment. If the employee wants the solicitor to negotiate improved terms on their behalf, the costs may surpass those which is covered in the agreement, this may be a stumbling block.
Indeed, the role played by the employee’s independent solicitor is an aspect which is sometimes overlooked within Compromise Agreements, and crucially, the impact they can have on the overall process.
While employees are free to choose their own legal adviser, many businesses provide a list of suggested solicitors to support them in obtaining the required independent advice. This is not about influencing the employee’s choice, as indeed the advice must be impartial, it is about facilitating a smoother, more efficient process.
From an employer’s perspective, the ideal outcome is a commercially sensible agreement reached without unnecessary delay, cost or conflict. In practice, this often depends on the approach taken by the employee’s solicitor. A pragmatic, resolution-focused adviser will assess the circumstances quickly, identify any genuinely relevant issues and engage in proportionate negotiations. This keeps matters on track and avoids the escalation that can arise when unnecessary points are raised.
By contrast, where an overly adversarial or unfocused approach is taken, the process can become protracted and costly. Requests for amendments that add little value, or a tendency to take combative positions as a default, can frustrate what should otherwise be a straightforward negotiation. This not only increases legal spend but can also undermine the aim of achieving an amicable exit.
Sometimes an “Exit Package” may be requested by an employee, or a query regarding a potential agreement may come up during a conversation around resolving another issue. It is important to note that there are risks (particularly for the employer) when broaching such an agreement, which may in fact worsen the situation, both in respect to the working relationship and in terms of legal exposure.
Regardless of how the discussion regarding a potential Compromise agreement materializes, it is important that any conversations and documentation is specifically explained and marked as “Without Prejudice”. In GB the term “Protected Conversations” is often used, however these do not exist in NI’s legal framework. Without Prejudice meetings or discussions allow for honest discussion without jeopardizing or committing to any future actions (i.e. ability for employee to take a claim, or employer to pursue disciplinary action). The simple act of not referring to such initial discussions as Without Prejudice, can place the employer at significant risk later, should an agreement not ultimately be reached.
When approaching an agreement in an initial meeting, the employer should always make it clear that:
In looking at the actual process, it is typically as follows:
Step 1: Employer makes an offer, this often happens during a without prejudice meeting.
Step 2: Employee receives the draft agreement. This sets out the compensation, termination date, clauses, and conditions.
Step 3: Employee gets independent legal advice. Some employees choose to meet their solicitor in person, but many complete the process over the phone and email.
Step 4: Negotiation (optional). Employees may negotiate: Higher compensation, Amendments to confidentiality wording, Better reference wording, Removal or reduction of restrictive covenants, Correct payment terms.
Step 5: Signing. The employer usually signs first, but either order is acceptable. Once both parties sign, the agreement is binding.
Step 6: Payment. Employers typically pay within 14 to 28 days, depending on the terms within the agreement.
Any failure to honor the agreement by either party, including payment terms can be pursued as a Breach. Outcome may include not only repayment of the settlement amount, but also related damages including reputational and Contractual, as well as associated legal fees. The impact can be significant for both parties.
Whilst compromise agreements can cover many workplace disputes, certain claims are excluded and cannot be enforced (even if included in the document) in order to protect employees’ fundamental rights. For example:
Being aware of these exclusions can help manage expectations and ensure that both employer and employee fully understand the scope of their Compromise agreement.
People Management Solutions can provide advice and support to assist in approaching and facilitating a Compromise Agreement within your organisation, as well as recommending key legal advisors where required. If you have any queries regarding Compromise Agreements, or require any assistance in this area, please do reach out to us.