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Compromise Agreements Vs. Settlement Agreements

Posted by Davenport Solicitors Team on August 26, 2021 in Settlement Agreements

Settlement agreements and compromise agreements are often confused. In this post, we look at the difference between compromise agreement and settlement agreement.

What is a Compromise Agreement?

A compromise agreement is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims and in return, the employer will agree to pay financial compensation.

Sometimes the agreement will include other things of benefit to the employee, such as an agreed reference letter. An employee can make a claim against a business under both their contract of employment and under statute.

In many cases, a business may want to make a payment to an employee in return for an effective waiver of their potential claims. Businesses can enter into an agreement with an employee to settle potential claims when they are still working for the business, but in most situations, their employment will have ended (or be about to end).

What is a Settlement Agreement?

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding agreement between you and your employer. This usually provides for a severance payment by the employer in return for your agreement not to pursue any claims in a Tribunal or a Court.

The employer will usually require you to keep the terms, for example, the amount and the surrounding circumstances of your contract’s termination, confidential.

A settlement agreement is usually used in connection with ending the employment, but it doesn’t have to be. A settlement agreement could also be used where the employment is ongoing, but both parties want to settle a dispute that has arisen between them.

Typically, a settlement agreement’s purpose is to confirm termination of someone’s employment and ensure that the employee will not bring legal claims against the employer in return for compensation, usually financial.

Find out more about settlement agreements and to which situations they may apply here.

How is a Settlement Agreement different to a Compromise Agreement?

So what is the difference between a compromise agreement and a settlement agreement then? None is the short answer. They are the same thing.

Prior to 2013, Settlement Agreements were known as Compromise Agreements. They were to “compromise” claims that employees might have. In July 2013, the Enterprise and Regulatory Reform Act was introduced and the name changed from compromise agreement to settlement agreement, on the basis that the language used more accurately reflected what the agreements were – they were a settlement of claims rather than a compromise of claims.

Why do Employers use Settlement Agreements in the UK?

A settlement agreement must relate to a particular complaint or proceeding, so they’re often used when there is a dispute between employee and employer.

They are also used in situations where a fair disciplinary or termination process is not being followed in order to allow the relationship to come to a quick and dignified conclusion. Settlement agreements are often used to avoid employment tribunal situations.

A situation in which you might consider using a settlement agreement could be, for example, where an employee is not performing well and neither party wants to go through a long capability process, and both employer and employee are willing to bring the employment to a quick end on agreed financial terms.

Benefits of a Settlement Agreement

A settlement arrangement can be beneficial to both parties. For the employee, a settlement agreement ensures they have the certainty of being compensated for the loss of their job as well as the promise perhaps of a good reference for their next position.

For the employer, settlement agreements can mean they avoid costly outcomes such as having to go through an employment tribunal or there being a dispute over the terms of dismissal.

Cost of a Settlement Agreement

If an employer offers an employee a Settlement Agreement, they will usually pay a contribution towards the employee’s legal costs. This is because it’s a requirement of a Settlement Agreement that you get independent legal advice.

Without independent legal advice, an agreement won’t be legally binding. The contribution the employer makes is usually in the region of £200 to £500 plus VAT.

If a Lawyer or legal advisor tries to negotiate a better settlement for the employee, their legal fees could be more than their employer has contributed.

Should I Accept the Settlement Agreement?

It is always a good idea to carefully consider what you are being offered by your employer in order to allow you to make an informed decision about how to proceed: consider what you want out of the situation; whether you would be prepared to go back to your job if you reject the settlement agreement; and whether what you want (in terms of your settlement agreement) is achievable.

You generally have three options if you have been offered a settlement agreement:

  1. Accept the settlement agreement;
  2. Negotiate it; or
  3. Reject it.

If you would like Davenport Solicitors to support you with further advice on Settlement Agreements or to speak to our specialist Employment Law Solicitors, contact us. Email contact@davenportsolicitors.com, call 02079 036888, or visit our contact us page.

The material contained on this website contains general information only and does not constitute legal or other professional advice and should not be relied upon as such. While every care has been taken in the preparation of the information on this site, readers are advised to seek specific legal advice in relation to any decision or course of action.


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