In the United Kingdom, a compromise agreement is a specific type of contract, regulated by statute, between an employer and its employee (or ex-employee) under which the employee receives a negotiated financial sum in exchange for agreeing that he or she will have no further claim against the employer as a result of any breach of a statutory obligation by the employer.
Except when ACAS have been involved and arranged a COT3 settlement, compromise agreements are the only means whereby an employee can waive statutory claims such as unfair dismissal, discrimination or redundancy. The agreement will only be valid where (i) it is in writing and (ii) the employee has received independent advice from a solicitor who has professional indemnity insurance. An employee cannot compromise potential future claims, though claims that have already arisen, unknown to the employee, can be waived.
In practice, a compromise agreement will also contain a waiver of any claim for breach of contract as well as statutory claims, though such a waiver does not need to satisfy the same requirements in order to be valid.
Each agreement must be tailored to meet the facts and circumstances of the case. It is therefore impossible to adopt a one size fits all approach to drafting of a compromise agreement. The detail and existence of a compromise agreement should remain confidential from third parties.
The advantage for the employer is that they are able to draw a line under an employee's departure and feel protected from future claims. The advantage for the employee is the financial sum received in return. In addition to confidentiality clauses, it may also include an agreed reference.