If you’re leaving your job, whether due to redundancy, a workplace dispute, or by mutual agreement, your employer might offer you a compromise agreement. Helping you to move on quickly, a fair payout now – with agreed terms and the freedom to start your next chapter – is often worth far more than the stress and risk of a legal fight.
In this guide, we take a look at compromise agreements: what they are, what you can expect, and why legal advice is essential.
What is a compromise agreement?
A compromise agreement is a legally binding contract between you and your employer. In it, you agree not to bring any future claims (such as unfair dismissal or discrimination) against your employer, usually in exchange for a financial payment.
Today, the legal term is ‘settlement agreement’, but many people and employers still use ‘compromise agreement’. Both terms refer to the same thing.
Compromise agreements offer several key benefits to employees:
- Fast: Resolve matters quickly, often on the same day.
- Straightforward: Avoid the stress of a legal battle.
- No cost to you: Your employer will likely cover your legal fees.
- Tax savings: Compensation can be paid tax-free up to £30,000.
- Protect your future career: Walk away with an agreed reference.
What’s included in a compromise agreement?
A compromise agreement marks a clean break and typically includes:
- A financial payment (e.g. compensation or redundancy)
- Waiver of legal claims
- Terms around confidentiality and references
- Confirmation that you’ve received independent legal advice.
What is the compromise agreement process?
The compromise agreement process can be quick and straightforward with the right legal support. Here’s what to expect:
1. You receive the compromise agreement
Your employer will give you a written compromise agreement, usually outlining the financial offer, termination terms, and legal conditions. You may receive it at the start of redundancy discussions or after an off-the-record conversation. In some cases, you might be the one to propose the settlement agreement.
2. You take legal advice
You must get advice from an independent solicitor before signing. Your employer usually pays for this.
3. Your solicitor reviews the terms
Your settlement agreement solicitor will:
- Explain what each clause means
- Ensure you know what you are giving up
- Check the payment offer is fair and accurate
- Review the tax treatment
- Make sure your rights are protected.
If changes are needed, your solicitor may negotiate directly with your employer.
4. You sign the compromise agreement
Once you’re happy with the terms and your solicitor has confirmed it’s safe to proceed, you’ll sign the agreement. Your solicitor will also sign a certificate confirming you received independent legal advice.
5. You receive your payment
After signing a compromise agreement, your employer will process the agreed payments. This will be within a specified timeframe, depending on the terms in the agreement.
Legal framework: Code of Practice and Employment Rights Act
A compromise agreement must meet specific legal requirements to be valid and enforceable. These requirements exist to protect you.
Here’s what the law says:
- The agreement must be in writing with the terms clearly set out
- The agreement must specify the particular claims you’re giving up, for example, claims for unfair dismissal or breach of contract
- You must be given adequate time to review the compromise agreement and obtain professional advice
- You shouldn’t feel pressured to sign the compromise agreement. If there is undue pressure, the agreement may not be valid
- The agreement must be reviewed by a qualified professional (with indemnity insurance). Your employer usually pays for this legal advice
- Your solicitor’s details must be included in the agreement to confirm that legal advice was given correctly
- There must be a clause confirming that all the required legal steps have been followed.
How much should I get in a compromise agreement?
There’s no fixed amount, but here are some typical factors that influence the average compromise agreement payout:
- Your salary and length of service
- Contractual entitlements (e.g. PILON, bonus, unused holiday)
- Whether you have a strong potential claim (e.g. for unfair dismissal or discrimination)
- The reason for termination (redundancy vs performance vs mutual agreement)
- Whether your employer wants a fast, clean exit.
A typical payment may include:
- Contractual payments (e.g. unpaid wages, notice pay, holiday pay, etc.)
- A compensation payment, which is tax-free up to £30,000 (we’ll cover that shortly)
- Statutory or enhanced redundancy pay, if applicable.
Your solicitor can advise you on whether the compromise agreement offer is reasonable, or whether it’s worth negotiating for more.
How to ask for a compromise agreement
You don’t have to wait for your employer to bring it up. If you feel that the working relationship has broken down, or that a fair exit would be best, you can ask your employer to consider a compromise agreement. This is often done through a ‘protected conversation’, where both sides speak openly and off the record.
You might say:
“Given the current situation, would you consider offering a compromise agreement so we can end things on agreed terms?”
If handled professionally, this approach can lead to a mutually beneficial outcome. However, your employer must agree to enter into these discussions and they are not obliged to offer a compromise agreement, especially if the reason is simply that you want to resign or move on without cause.
Are compromise agreements taxable?
Some parts of a compromise agreement are taxable, and some are not. Here’s a simple breakdown:
Tax-free (up to £30,000)
- Ex gratia payments (compensation for loss of employment)
- Statutory or enhanced redundancy pay
- Payments into pensions (as long as they adhere to the annual pension contribution limit).
Always taxable
- Salary owed up to your leave date
- Holiday pay
- PILON (Payment in Lieu of Notice)
- Bonuses and commission
- Payments for restrictive covenants.
Your solicitor will help ensure the payment is structured correctly so you don’t pay more tax than necessary. Your employer must also deduct tax from the taxable elements under PAYE.
You can find out more about the tax implications of settlement agreements here.
Compromise agreement and redundancy
If you’re being made redundant – whether voluntary or compulsory – your employer might offer a compromise agreement alongside your redundancy package. This gives you a financial cushion and helps protect them against the risk of a future claim, especially if you feel the redundancy process has been unfair or rushed.
Redundancy-related compromise agreements often include:
- Statutory redundancy pay
- An enhanced redundancy package
- Payment in lieu of notice (PILON)
- Accrued but untaken holiday pay.
As discussed, these payments may be partly tax-free, depending on how they’re structured.
Compromise agreements – FAQ’s
Let’s look at some of the most common questions we’ve been asked about compromise agreements.
Can a compromise agreement be overturned?
Compromise agreements are legally binding. However, very rarely, they can be overturned in unusual circumstances, such as if:
- You were misled or pressured into signing
- The agreement was fundamentally unfair
- One party fails to meet their obligations.
Are compromise agreements confidential?
Yes, compromise agreements typically include confidentiality clauses that require both parties to keep the terms and circumstances of the agreement private (apart from in very specific circumstances).
How long does a compromise agreement last?
A compromise agreement lasts indefinitely. Once it’s signed, the terms apply permanently, unless both parties agree in writing to change them.
For example:
- Confidentiality clauses have no time limit
- Restrictive covenants (e.g. not working for a competitor) may apply for a fixed period (e.g. 6–12 months)
- The waiver of legal claims is permanent. You can’t bring a claim later unless fraud or misrepresentation is proven.
Do I have to sign a compromise agreement?
No, you’re not legally required to sign a compromise agreement and you should only do so if you’re happy with the terms and feel the offer is fair. When deciding what is best for you, weighing up the 'pain to gain' is essential.
You may get a higher payment if you get to court, but you should also consider the time, energy, and emotional toll of pursuing a legal claim versus the practical benefits of resolving the matter early.
How long after signing a compromise agreement do I get paid?
You may receive payment within as little as 7 to 14 days of signing, but this can vary depending on what’s written in the agreement. The payment terms should be clearly stated, so there’s no confusion.
Can I get a job after signing a compromise agreement?
Signing a compromise agreement does not stop you from getting another job. Most agreements include a clause about providing a reference, which can help you move on smoothly. And you don’t need to tell future employers about the agreement unless you choose to. However, if your agreement includes restrictive covenants, there may be some limitations on what you can do next.
What are restrictive covenants in a compromise agreement?
Restrictive covenants are clauses in your agreement that limit what you can do after leaving your job. Common examples include:
- Not working for a competitor for a set period
- Not contacting former clients or colleagues
- Not using confidential information.
Your solicitor will explain more if these apply to you, and may be able to negotiate changes if needed.
Can I still make a legal claim against my employer if I sign a compromise agreement?
No, by signing a compromise agreement, you give up the right to sue your employer, unless the agreement specifies otherwise, or in very specific circumstances.
Same-day compromise agreement legal advice
To avoid delays and unnecessary stress, our same-day service ensures your compromise agreement is reviewed quickly, negotiated if needed, and signed without fuss. With clear, expert guidance, you can:
- Understand your rights and what you’re agreeing to
- Make sure your compensation is fair and correctly taxed
- Move on from your role with confidence and peace of mind.
Led by Gordon Turner, we provide a high quality service that is second to none. Get fast, fair, and free legal advice right now. Simply call us today on 020 7247 7190 or complete the enquiry form on this page.
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