What Is a Compromise Agreement in Employment Law?

A compromise agreement, often called a settlement agreement, is a legally binding contract between an employer and an employee that sets out the agreed terms of the employee’s termination.

Usually, the employee will agree to waive any future claims against their employer for unfair dismissal or discrimination in exchange for financial compensation. Confidentiality is typically a term of a compromise agreement. It often applies to the dispute’s nature, the circumstances which led both parties to this point, and the amount of any payment.

A settlement agreement is a serious step. In entering into a settlement or compromise agreement you are signing away your rights to ‘access to justice’ and as such this is taken incredibly seriously.

Given the legal rights being signed away, to prevent employers from abusing their power in the relationship between an employer and employee, it is a legal requirement that the employee must obtain legal advice before a settlement agreement can be concluded in a binding way. The employer will typically contribute towards the cost of that advice. 

Indeed, employers will often encourage their employee to obtain advice early and we often become involved in the stages of negotiation leading to the terms of the settlement agreement. 

Compromise agreements can avoid the cost and difficulty of a long, drawn-out process of dispute and legal claims following the termination of an employee’s contract. Any settlement agreement should provide clarity and certainty and be well negotiated with legal advice on both sides, to reach a just and fair outcome following a transparent procedure.