Q. What is a Compromise Agreement?
A. This is essentially a legally binding agreement between the employer and employee or as the case may be a former employee where the employee will agree to abstain from pursuing claims that they may have against their employer in relation to their employment or the termination of their employment.

In return for agreeing not to pursue a claim at the Employment Tribunal the employer will offer the employee a financial settlement.

Whether such settlement is favourable will depend on the facts of each case.

The agreement will usually arise when the employer wants to dismiss the employee quickly and without the risk of an Employment Tribunal claim.

The agreement must be specific as to what claims are compromised and case law has determined that a one-size fits all approach is insufficient for an employer to rely on when trying to compromise the potential claims of an employee.

A common misconception in relation to compromise agreements is that the compensatory amount is paid free of tax.

It is therefore essential to consider an employee's contractual terms when either drafting or considering the terms of the compromise agreement as all payments that derive from one's contract of employment are liable to tax.

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