What is a Compromise Agreement?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 March 2020
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A compromise agreement is a type of legally binding document that outlines the types of compensation an employee receives at the time his or her employment is terminated. The use of this type of agreement is common in nations that provide the opportunity for employee tribunals in the event that an employer chooses to let an employee go for any purpose. Typically, the terms of the agreement are negotiated between the employer and the former employee and help to minimize the chances that the employee will later seek further compensation by filing some type of wrongful termination suit.

In nations like the United Kingdom, the compromise agreement is formally recognized by government statute as a legitimate means of establishing a legal settlement without the need to hold some sort of tribunal. It is not unusual for both parties to retain legal counsel to negotiate terms that are ultimately acceptable to everyone concerned. Depending on the circumstances, the preparation and acceptance of the compromise agreement can take place in a matter of days or require an extended length of time before both parties are satisfied and willing to commit to the contract.


The use of the compromise agreement may occur in a number of situations. One common example is voluntary redundancy, in which an employee willingly agrees to end his or her working relationship with the employer, usually due to economic cutbacks on the part of the employer. In this scenario, the agreement is used to define the provisions for a severance package, including any lump sum payment on the front end, any stock issues that are awarded to the outgoing employee, and any other financial provisions that may be relevant to individual situations.

Laws regarding the content of a compromise agreement will vary from one country to another. Some may also restate specifics regarding the former employee’s use of proprietary information for a defined time frame after the severance takes place. Should the terms of the employment termination require that stock shares be repurchased by the employer, the content may include provisions that govern the rate per share that is paid as part of the repurchase. Since the text of the compromise agreement can differ from one setting to the next, obtaining the services of a legal professional to aid in both the negotiations and the approval of the finished document is imperative, if both parties are to protect their interests and arrive at a mutually beneficial conclusion.



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