What are compromise agreements?
From an employee’s point of view, compromise agreements provide a guaranteed sum of money and other benefits up front, without having to go through the uncertainty, worry and cost of employment tribunal proceedings. They can, therefore, ensure a relatively smooth exit for employees and all important issues can be covered in the written agreement.
The main purpose of a compromise agreement is for the employee to agree a compensation payment and, sometimes, other benefits in return for not pursuing claims against the employer. They are often used in connection with the termination of the employment relationship to provide a clean break.
Are payments paid under a compromise agreement taxable?
The starting point is that any payments that are made pursuant to the contract of employment will be fully taxable and subject to deductions for national insurance.
Some examples of taxable payments are: Salary, contractual bonuses/commission payments, accrued holiday pay, pay in lieu of notice in certain circumstances,payments for entering into restrictive covenants.
The first £30,000 of a payment that is paid in connection with the termination of employment is tax free provided that it is not otherwise chargeable to tax.
What type of payment falls within this exemption?
A compensatory payment ie to compromise a claim or claims that the employee may otherwise pursue.
Anything over £30,000 is subject to tax but not to deductions for national insurance contributions.
Why is a compromise agreement necessary?
The only way in which you can validly agree to forego or give up certain statutory rights against your employer, such as, for example, the right to pursue a claim of unfair dismissal or unlawful discrimination in return for a compensatory payment is by entering into a valid compromise agreement. There are certain legal requirements for a compromise agreement to be valid. A sensible employer will not want to make compensatory payments to an employee without making sure that a valid compromise agreement is entered into.
What is the process if you choose to instruct us and how long does it take?
1. We will send our terms and conditions and costs information to you by e-mail and request proof of your identity.
2. We will ask you for a copy of the proposed compromise agreement and it is also helpful if you can provide a copy of your contract of employment and any staff handbook.
3. We will speak to you to ascertain the background and the reason for the compromise agreement having been offered to you. We shall also ask you how you would prefer to deal with us and whether you wish to have a face to face meeting.
4. We shall advise you in writing on the terms offered and whether we consider that there is scope for negotiating improved terms based upon the information you have provided, the terms of the compromise agreement and your contractual terms. We shall also advise you as to the effect of entering into a compromise agreement.
5. In accordance with your instructions, we shall contact your employer or their representative with any proposed amendments and/or with a view to improving the terms offered. Amendments are often required to the wording to ensure that your interests are adequately protected.
6. We shall continue to liaise with you and your employer and act as a “go between” to secure the best possible outcome for you.
7. Once the terms are agreed, we sign the adviser’s certificate and you sign 2 copies of the agreement. This is returned to your employer who will then sign and return one copy to you for your records.
8. If you are happy with the proposed terms at the outset and no/minor amendments are required to the wording, it can be concluded very quickly. If more substantial amendment is required or negotiation then this can take a little longer depending on how quickly the employer responds to our points. However, ordinarily employers are keen to resolve compromise agreements as quickly as possible and usually they can be finalised within 1-2 weeks.