In the UK, a compromise agreement – now known as a Settlement Agreement – is a specific type of contract, regulated by statute, between you the employer and one of your employees (or ex-employees) under which your employee receives payment in exchange for agreeing that they will have no further claim against you as a result of any breach of a statutory obligation by your organisation.

A Settlement Agreement is a legally binding contract which can be used to end an employment relationship on agreed terms. Their main feature is that they waive an individual’s right to make a claim to a court or employment tribunal on the matters that are specifically covered in the agreement. Settlement Agreements may be proposed prior to undertaking any other formal process. They usually include some form of payment to the employee by the employer and may also include a reference.

For a settlement agreement to be legal, the following conditions must be met:

• The agreement must be in writing
• The agreement must relate to a particular complaint or proceedings
• The employee must have received advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue that complaint or proceedings before an employment tribunal
• The independent adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice
• The agreement must identify the adviser
• The agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied.
• A Settlement Agreement can be proposed by both employers and employees although they will normally be proposed by the employer. A proposal can be made at any stage of an employment relationship.

Acas has produced a comprehensive Code of Practice on Settlement Agreements, which you can download for free here. It is very important to take HR advice before starting a process of discussing a Settlement Agreement with your employees so do get in touch if you have any questions. Please call me on 0118 940 3032 or click here to email me.