What is a compromise agreement?
What are the legal requirements to respect?
When do you use a compromising agreement and what does it include?
In this article, we will break down the concept of “compromise agreement” so you know all there is to know about it.
We will answer the question of what is a compromise agreement, provide you with its definition, benefits, scope, when to use it, its legal requirements, the difference with a settlement agreement, sample clauses in a template and more.
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Table of Contents
What is a compromise agreement
A compromise agreement or compromising agreement is used when a company agrees to pay financial compensation to an employee in exchange for the settlement of potential, existing and known claims.
This type of agreement is regulated by law in common law countries such as the United Kingdom, Australia and others.
In other words, a compromise agreement allows an employer and an employee to settle potential lawsuits in a legally binding agreement.
In a compromise agreement, an employee having a valid claim for illegal termination practices (potential claim) will waive such potential claim in exchange for monetary compensation (substituted performance)
Typically, a business will enter into a compromise agreement to settle potential disputes in the context of the termination of a person’s employment or shortly prior to termination.
Although rare, it is also possible to enter into compromise agreements even during the employment of an individual so long as the parties are looking to definitively resolve a source of dispute.
Compromise agreement definition
According to Duhaime’s Law Dictionary, a compromise agreement is defined as:
An agreement to settle a previously existing claim with a substituted performance
What is notable with this definition is that a compromise agreement allows the parties to settle a previous claim through a substituted performance.
Benefits of compromise agreements
For employers, the advantage of entering into a compromise agreement is to put an end to the dispute immediately.
In certain cases, the time loss, internal costs and risks of litigating a matter may not justify proceeding to court.
An employer can minimize risk and avoid further costs
A company can minimize risk and cut its losses by paying a certain sum of money to settle an employee’s claim (or ex-employee).
There are important advantages for an employee to compromise a claim.
Employees can get financial consideration and even more
What is common practice is for employees to receive a sum of money as consideration to compromise past and existing claims.
In addition to that, it is usual to see employees get a reference letter allowing them to move on to other companies and find new employment opportunities.
An employee may be able to negotiate aspects that can include both monetary compensation but non-monetary compensation as well.
Waiver of contractual claims
Contractual claims can be waived or settled by entering into a contractual waiver.
A contract waiver is an express contract entered into between the parties agreeing to waive certain rights typically in exchange for a consideration of some kind.
Typically, contract waivers are regulated by standard contract law requirements to acquire a legally binding and effective.
In countries regulating employment statutory claim waivers through compromise agreements, observing the standard contract law requirements will not be sufficient to discharge statutory claims.
Waiver of statutory claims
Depending on the laws applicable in your jurisdiction, certain statutory claims can only be waived using a compromise agreement to the extent you follow the prescriptions of the law.
In other words, a standard contractual waiver will not be sufficient to waive a statutory claim.
In certain jurisdictions, compromise agreements are the only way you can waive employment-related statutory claims
Rather, you may need to enter into a compromise agreement to waive statutory claims and follow the legal requirements for its validity.
Waiver of past and present claims
What’s important to note is that you can only waive past and present claims (claims that have already arisen and known to the employee) using a compromise agreement.
Future and unknown claims cannot be waived using this process.
In some cases, defining the scope of the settlement may be tricky
What is tricky is that a compromise agreement can only settle known and existing claims.
What happens if an employer knows about a potential claim an employee may assert but the employee forgot to include that in the compromise agreement?
Should the employer mention it at the expense of entering into more negotiations on the settlement amount or should the employer risk keeping certain claims potentially unsettled?
In cases when you are not sure what’s the best thing to do, it may be a good idea to consult with an employment attorney.
When is a compromise agreement needed
A compromised agreement may be needed to resolve many statutory sources of claim between an employee and an employer.
A person may have legitimate reasons to file a claim against a company for various reasons, such as:
A claim may arise during the recruitment process, employment or in the context of a person’s termination.
In the event allegations of a claim are brought to the attention of the company, the company may decide to resolve the matter by entering into a compromise agreement.
According to The Guardian referring to a CIPD survey, aside from settling an existing claim, compromise agreements are used to:
- Remove an employee for poor performance or misconduct (38.95%)
- Prevent legal disputes in the event of redundancy (25.75%)
- Remove senior staff without embarrassment (24.3%)
Depending on your jurisdiction, certain claims cannot be resolved using a comprise agreement such as personal injury claims, pension-related claims or disputes relating to the transfer of a business.
Compromise agreement requirements
Compromise agreements must follow the prescriptions of the law to be legally binding and valid.
Although you will need to consult an employment lawyer in your jurisdiction, the following elements are important requirements to consider:
- You need a written agreement
- The written agreement must be related to the specifics of the complaint
- The employee must obtain legal advice on the terms and conditions of the written agreement
- The advice must be from a professional such as a lawyer or union official having professional liability insurance
- The legal adviser must be clearly identified
- You need a written statement that the conditions relating to compromise agreements are fulfilled
It’s important to follow the legal requirements to have a binding compromise agreement
It’s important to follow these requirements to obtain a valid waiver of claim from an employee.
If not, the employee’s statutory claim may not be effectively extinguished or waived.
What is the compromise agreement format
The format and the content of compromising agreements are, in most part, left to the discretion of the employer and employee.
What’s important is for the parties to respect the legal requirements for its formation and validity.
The parties are generally free to decide as to the terms of their settlement in a compromise agreements
The parties can mutually agree to resolve a statutory claim in a way that is mutually satisfactory and can draft the content of the agreement to reflect that.
Just like any contractual waiver agreements, there are certain clauses or provisions that you can expect to see, such as:
- Details surrounding the compensation
- Agreement on what costs are to be assumed by the employer
- A waiver and discharge by the employee of the existing statutory claims
- A waiver for any possible breach of contract claims
- Inclusion of restrictive covenants
- Confidentiality clauses
Often, the parties will include breach of contract claims in their compromise agreement so they can settle both statutory and contractual claims existing at the time.
Compromise agreement or settlement agreement
A compromise agreement is an agreement resolving the statutory claims of an employee against an employer in the context of an employment agreement or relationship.
A settlement agreement is an agreement that parties use to generally settle a claim in any context.
They both have the same end result (settlement of potential claim) but they may have different legal requirements to observe depending on your jurisdiction.
They both have the same end result but will have different scope and legal validity requirements
A settlement agreement, generally speaking, follows ordinary contract law for its formation and legally binding status whereas a compromise agreement is the only way to waive certain statutory rights by following the formation and validity prescriptions of the law.
At the end of the day, both a settlement agreements and compromise agreements allow you to waive, release and discharge certain claims.
Compromise agreement template
A compromise agreement is generally drafted to reflect the specifics of a particular claim.
Nonetheless, you can use a compromise agreement template to guide you in drafting the agreement.
Here are some of the provisions should expect in your agreement:
- Termination of employment (if employment is being terminated)
- Reimbursement of expenses
- Exercise of stock options
- Payment of any bonus
- Legal costs
- Confidentiality of the terms of the agreement
- Non-disclosure obligations
- Non-competition clause
- Non-solicitation clause
- Employee’s waiver
- Settlement of possible breach of contract claims
- Legal advice as a condition to the agreement
Let’s look at samples of how you can formulate certain provisions of your compromise agreement.
Here is a sample waiver clause:
The Employee waives, releases, remises and forever discharges the Company, its assigns, transferees, agents, heirs, representatives and estate from any and all known claims, including but not limited to, any and all claims arising out of or in connection with the employment with the Company or any other claim or claims which the Employee has or may have against the Company provided that such claim or claims were known to the Employee at the time of execution of this Agreement.
Here is a sample warranty clause an employer may demand from an employee:
The Employee confirms that she has received advice from an independent legal adviser (“the Adviser”) as to the terms and effect of this Agreement and in particular its effect on your ability to pursue your rights before an Employment Tribunal or court; was advised by the Adviser that there was in force, at the time of the advice referred to above, a contract of insurance covering the risk of a claim by you in respect of loss arising in consequence of that advice; and before entering into this Agreement, the Employee raised with the Adviser all information relevant to the employment and the termination thereof that may give rise to any claims, including but not limited to statutory claims.
Legal advice condition
Here is a sample of contract language imposing the legal advice as a condition to entering into the compromise agreement:
It is a condition of this Agreement that the Employee obtain legal advice as to the terms and effect of this Agreement from a legal adviser and that the adviser signs and returns to the Company a letter in the form set out in the present Agreement.
Settlement of statutory and contractual claims
Here is a sample provision relating to the settlement of statutory and contractual claims:
The terms of this Compromise Agreement shall be accepted by the Employee in full and final settlement of all and any claims or rights of action against the Company, affiliate or associate arising out of your employment or its termination, whether contractual or statutory or otherwise, whether in the [SPECIFY COUNTRIES] or any other country in the world, or any other claim whatsoever that you may have against the Company including (but not limited to) any claim in relation to any breach of your contract of employment including but not limited to unpaid wages, accrued but unpaid holiday pay and/or sick pay, bonus and/or commission, private medical insurance, private health insurance or any other contractual or discretionary benefits; and/or in relation to notice or pay in lieu of notice except as expressly provided for in this Agreement; and/or otherwise arising under the law of [SPECIFY LAWS]
Compromise agreement FAQ
Is a settlement agreement the same as a compromise agreement?
A settlement agreement achieves the same objective as a compromise agreement but depending on your jurisdiction, they will have slightly different scope and have different legal requirements.
A settlement agreement will generally need to comply with contract law requirements
A settlement agreement will generally need to follow standard contract law requirements to become legally binding between the parties and can cover a very broad scope of possible claims.
Often, a settlement agreement is used to settle contractual claims.
A compromise agreement is required to resolve employment-related statutory claims and must respect the requirements of the law
On the flip side, a compromise agreement is generally required by the employment laws of certain countries like the UK, Australia, Ireland or other common law countries, to resolve statutory disputes relating to an employment agreement.
For a compromise agreement to be valid, it must be in writing, can only settle existing and known claims and the employee must have obtained the advice of a legal advisor on the terms and conditions of the agreement before signing.
A compromise agreement will only be legally binding if it strictly follows the requirements of the law.
Should I accept a settlement agreement?
A person should accept a settlement when it makes sense in the circumstances and provides the necessary relief or compensation for the injuries suffered or asserted claims.
Every case should be evaluated on its own merits.
In some cases, a financial settlement can be effective to compensate for certain damages whereas it may not be effective in other circumstances.
Before accepting a settlement agreement, make sure that:
- You have read the terms and conditions of the settlement agreement
- You have consulted with an attorney
- The consideration of the settlement adequately compensates you
- You do not waive rights over and above what is relevant to settle the dispute
- You do not sign something based on emotions
- You do not sign something under pressure
How do you negotiate a good compromise agreement?
A good compromise agreement can be negotiated in such a way that you walk away with the best possible consideration or compensation.
You can be creative during your negotiations by:
- Focusing on the strong aspects of your claim
- Scoping the settlement to the specifics of your claim
- Negotiating reasonable financial compensation
- Negotiating compensation other than a sum of money like a reference letter
- Make sure other agreements that must stay in force remain in force
- Think about the tax consequences of the consideration you will get
- Make sure the payments are properly qualified for tax purposes
- Think about all aspects of your employment like bonuses, stock options, company shares or other benefits
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