What is a compromise agreement and what are the benefits?

Q: "What requirements must be adhered to for a compromise agreement to be viewed as a legally binding document, and what are the advantages of such agreements?" 

Seamus: So compromise agreements are essentially an agreement between the employer and the employee. The compromise agreement will generally provide for the termination of the employee's employment. The basis of the compromise agreement is that the employee would be signing a legally binding agreement confirming that the employee won't bring any claims in respect of their employment against the employer.

So, if you look at it on a two-handed basis, the employer is normally paying some sort of compensation to the employee under the compromise agreement. Some sort of consideration doesn't necessarily always mean monetary, but what the employee is getting is a compensation payment usually, and what the employer is getting is an agreement to say that that's the end of the matter and the employee won't be bringing any claims in the Industrial Tribunal or in the courts against the employer. What it does, it provides for a clean and clear exit for both parties.

Scott: In a compromise agreement, the employee has to be legally represented or they have to have some kind of representation …

Seamus: There has to be some form of incentive within the agreement for the employee to sign. So usually you will see the ex-gratia payments be made sometimes. Payment in lieu of notice is paid as well. There are various tax implications that specific advice should be obtained on.

The compromise agreement is only legally binding when the employee has obtained independent legal advice in relation to the terms and conditions of the agreement and that the independent legal advisor has provided a schedule or a document to confirm that they've provided the independent legal advice.

So, in general, Article 245 of the Employment Northern Ireland Order 1996 provides they are something that is legally binding. They're committed to do it. If you give that employee a compromise agreement, or, in some circumstances, sometimes employers will get the employee to write down and sign a piece of paper saying, "I won't bring any claims against the employer. I'm resigning of my own free will."

Even if they get a compromise agreement and they sign it and they bring it back to you, it's absolutely worthless unless it comes with the schedule signed by the independent advisor to say that they've given the independent advice and that the employee has signed the agreement on foot of that.

Scott: A compromise agreement, I think it's still the case, you've got to list all of the things that you’re compromising.

Seamus: Yes. The claims themselves that you're compromising the employee out of must be contained within the agreement.

Related Article:

Angela Schettino discusses the advantages, risks, top tips and  your offer in Compromise (Settlement) Agreements

Seamus McGranaghan answers: Should we use a compromise or settlement agreement in redundancy?