Employment Update: Compromise Agreements to be renamed “Settlement Agreements”

23 July 2013

There are several upcoming changes to employment legislation (upon some of which we have already reported: ACAS; Employee Shareholder Proposals). A further impending change is the renaming of “Compromise Agreements” to “Settlement Agreements” under section 23 of the Enterprise and Regulatory Reform Act 2013 which will be effective from 29 July 2013.

A Compromise/Settlement Agreement is used at the end of a person’s employment with an employer and is most commonly used to “compromise” or “settle” any claims that the employee may have against their employer. For example, in certain circumstances, the employee may feel as though they were dismissed unfairly and have a claim for unfair dismissal against their previous employer. The parties can enter into a Compromise/Settlement Agreement under which the employee agrees not to bring any claims against the employer in exchange for being paid a sum of money (which subject to satisfying certain criteria can be tax free up to £30,000).

Another circumstance in which these agreements are often used is when the employer wishes to restrict the employee’s activities after termination of the employment (e.g. to prevent them from competing with the employer or soliciting staff) but there were no such provisions in the employee’s contract. Similar to above, the employee can agree to have their post-termination activities restricted in exchange for a sum of money (although such sum will not be tax free).

It is apparent that the proposed change is a change of name only and the content of such agreements will not change. Although all new agreements should be named and referred to as “Settlement Agreements”, the general consensus within the legal profession is that continuing to name them Compromise Agreements will not invalidate an otherwise valid agreement.

We are experienced in drafting and negotiating Compromise/Settlement Agreements for employers as well as reviewing, negotiating and advising on these agreements from an employee’s perspective. For further information, please contact our Employment Team.