Compromise agreements – proposed government reform

As part of its plans to reform employment law, the government wants to reduce the amount of employment disputes being resolved in the employment tribunal. In its response to the consultation on “Resolving Workplace Disputes“, the government is keen to increase the use of compromise agreements as an alternative means of resolving disputes.

Responses to the consultation showed that compromise agreements are commonly used to resolve employment disputes. Evidently, compromise agreements are not the solution in every situation, but if they can be used they have several benefits. The main advantage is that they reduce the time, cost, and stress for both the employer and employee as compared with going to the tribunal. In addition, the employer has the assurance that there will be no litigation in the future, and the employee will receive a financial settlement in return for giving up their right to make a claim.

Simplifying compromise agreements

The government intends to simplify compromise agreements, to make them cheaper and easier to use. The government will also consider preparing a model text for a compromise agreement that could be downloaded, the idea being that by having standard wording legal fees would be reduced, both for the employer in drafting a compromise agreement and for the employee in having the compromise agreement reviewed. Presumably it would still be possible to amend the agreements so as to tailor them to individual claims.

It is also planned to rename compromise agreements “settlement agreements”, which the government believes is a “more widely understood term” and without the connotations of giving in or “compromising” that can lead to difficulties.

Blanket waiver of claims

Currently, compromise agreements must list the “particular proceedings” to be compromised. As a result compromise agreements often list all potential claims separately to ensure everything is covered, which increases the length of the agreement. The government will consider permitting a blanket waiver that would cover all existing and future claims to be used without the need to list all potential claims. Latent personal injury claims and accrued pension rights, which cannot be compromised, would still be protected.

Concerns over s.147 Equality Act 2010

Section 147 of the Equality Act 2010 has caused uncertainty as to whether compromise agreements can be used to compromise discrimination claims. Similar to section 203(3) of the Employment Rights Act 1996 on the requirements for compromise agreements, section 147 sets out the requirements for settling claims under the Equality Act through a “qualifying compromise contract”.

However, it states that the employee must receive advice from an “independent advisor” on the terms and effect of the compromise agreement.  It goes on to say that an independent advisor cannot be connected to a person who is party to the contract. Clearly a lawyer will not be independent if they are also acting for the employer. But this can also be interpreted to mean that a lawyer who has advised an employee about his claims is not then able to “independently advise” the same employee on a compromise agreement because they are acting for the employee.

This is clearly illogical, and the government is going to “bring forward an amendment…to provide reassurance to parties that compromise agreements can safely be used” to resolve employment disputes concerning discrimination.

The Law Society has produced a practice note about this.