Compromise Agreements Bristol

With an increasing amount of employee legislation, writing a compromise agreement is becoming more and more popular for employers who want to save themselves the worry of a claim or a trip to Tribunal. Julia Carter, solicitor at Human and Legal Resources Limited, explains exactly what is involved.

A Compromise Agreement is a way of reaching a settlement with your employee where there is concern that he or she could bring a claim against you, perhaps for unfair dismissal or discrimination. Once they have signed, that employee cannot then pursue you through a court or Tribunal for matters arising out of their employment though the agreement will not usually prevent an employee bringing a claim in respect of any work-related injury.

How much should you offer the employee?

How much you decide to offer depends on what the parties agree. The lawyer advising the employee will consider what claims they may have in order to advise whether it is in their best interest to accept. It is therefore advisable to pitch the settlement at a realistic sum, bearing in mind they will probably try to negotiate upwards.

In addition the employee is likely to have contractual claims e.g. unpaid wages, contractual notice, loss of benefits but also, an employee who proves that s/he has been unfairly dismissed, would normally get a basic award (based on age and number of years service). Such an employee would also receive a compensatory award for financial loss following termination. So, you should consider how long it will take this employee to find another job that will pay a similar amount bearing in mind the employee’s age and experience, the industry and the financial climate at the time. Generally, three to six months net salary is a reasonable starting point.

Is the payment tax-free?

Settlement will frequently include a number of different elements such as unpaid salary, holiday pay, notice pay, redundancy pay, compensation for loss of office and so on. It is important for tax purposes that these are separately identified. There is a common misconception that the first £30,000 of any termination payment is tax free, but this is not necessarily the case. If any of the payment is classed as “earnings” it will be taxable and this would include most payments that are received under the employee’s contract of employment e.g. unpaid salary, holidays, bonuses and notice pay. (Notice pay is only contractual if you have a clause in the employee’s contract allowing the you to elect to pay them in lieu of notice – if there is no such clause then dismissal without notice will be breach of contract and any sum paid “in lieu of notice...