Is a Compromise Agreement the same as a Settlement Agreement?

There’s still a lot of people who search online for a compromise agreement or compromise agreement solicitor, rather than the more modern name of settlement agreement.

What is the difference between a Compromise Agreement and Settlement 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.

The Law on Settlement Agreements

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.

What are some reasons people are given Settlement Agreements?

In reality, that difference is somewhat nuanced. The fact is that settlement agreements are given to employees for a wide range of reasons, sometimes where there are no claims to be settled. A Settlement Agreement can be used as follows:

  • for redundancy
  • for disciplinary type issues
  • where personalities don’t fit
  • for capability issues

Are Settlement Agreements and Discussions About Them Confidential?

Section 111A Employment Rights Act allows employers to have conversations with employees on a confidential basis prior to the termination of their employment. These are so called “protected conversations” which means that they cannot be used by the employer as evidence in an employment tribunal.

What that often creates is a situation where an employer can offer a settlement agreement to an employer for almost any reason. Sometimes this means that they come out of the blue to the employees.

So we know then, that there is no real difference between a compromise agreement and a settlement agreement.

What are the legal requirements of a Settlement Agreement?

For a settlement agreement to be legally valid the following conditions must be met:

(a) The agreement must be in writing;
(b) The agreement must relate to a particular complaint or proceedings
(c) 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;
(d) 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;
(e) The agreement must identify the adviser;
(f) The agreement must state that the applicable
statutory conditions regulating the settlement agreement have been satisfied.

What is an Independent Adviser for Settlement Agreements?

In the legislation, the phrase “independent adviser” is used rather than solicitor and this is because other lawyers are able to give advice on settlement agreements. However, we’re settlement agreement solicitors and therefore can provide advice on the terms and effect of the settlement agreement and of course our solicitors are fully insured and regulated.

When looking at settlement agreements ACAS have a number of good guides both for employers and employees. They have their main page on settlement agreements – as well as the Code of Practice on Settlement Agreements.

Why Do I Need Independent Legal Advice on a Settlement Agreement?

So a solicitor must advise on the terms and effect of a settlement agreement. What is not technically part of the formal advice required by solicitor advising on settlement agreements is for them to consider whether the offer under a settlement agreement is correct – a solicitor advising on a settlement agreement is not obliged to assess whether the compensation offered is a good deal. Bizarre right?!

Our settlement agreement solicitors do always look at the merits of any complaints, grievances, claims and so forth and then provide advice on whether the deal offered is acceptable or not, and if not we will explain for your options for getting a better deal. We have a unique settlement agreement calculator – the only one online which calculates redundancy pay as well as giving you an idea what figures you should get for notice pay and compensation (ex-gratia sum, termination payment etc).

What makes a good Settlement Agreement Solicitor?

When looking for a solicitor for settlement agreement, it is important that you find someone who is an expert in settlement agreements, that is perhaps a given, but also someone who is going to give you time to talk and to understand all you’re going through. Many clients have told us that other solicitors seem to be rushed and uncaring – primarily because if the settlement agreement legal fee is low they can only justifying spending maybe 20 minutes with you. Our solicitor for settlement agreements give you as much time as you need.

Whether it’s a settlement agreement for employees or you are an employer wanting to give a settlement agreement to an employee, then Settlement Agreement Solicitor can help. Just get in touch and we will be more than happy to give you independent advice on any proposed settlement agreement.

Settlement Agreement Tax issues

For employees receiving a settlement agreement tax questions often arise. The general rule is that the first £30,000 of settlement payments can be made tax free, but this does not include salary, notice pay, benefits or holiday pay. The tax payable under a settlement agreement is always worth understanding. Settlement Agreement tax can be a tricky situation and often misunderstood by employers working without legal advice. They often try to pay notice pay (sometimes called pay in lieu of notice, or PILON) under the tax free termination payment. This is not allowed and is tax avoidance.

From April 2018, the Government brought in new legislation to ensure that the practice of paying notice pay as tax free under settlement agreements became unlawful. There is now a complicated statutory formula for calculating Post Employment Notice Pay (PENP) and working out what should be taxed and what can be paid tax free.

Our Settlement Agreement Solicitors can advise you of the tax position.

It is important to understand tax as all settlement agreements contain clauses known as a tax indemnity, which basically say that the employee remains liable for any additional tax payable if HMRC were to decide that more tax was payable.

When Are Payments Under Settlement Agreements Paid?

Settlement Agreement Payments are usually known as termination payments. Usually, settlement agreement payments are made within 14 days or 28 days of the termination date – the date on which an employees employment ends under a settlement agreement.

What Does Without Prejudice and Subject to Contract Mean?

Settlement Agreement Without Prejudice and Subject to Contract – this is a phrase you will often see at the top of a settlement agreement. Without Prejudice means that it is not permitted to be used as evidence against another party. An employer rarely admits liability under a settlement agreement. Subject to contract means that until both employer and employee sign the settlement agreement it is not a legally binding contract. They are often called a Without Prejudice Settlement Agreement. Whatever they’re called, our settlement agreement lawyers can help you get the advice you need.

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