Guidance

Statutory Payments and Compromise Agreements

Using Compromise Agreements if your employee stops working for you and has a potential claim against you for statutory pay as wages or salary.

If your employee stops working for you, they may have potential claims against you, eg to salary or wages which have not been paid in full. You can deal with this situation by a single agreement, sometimes described as a Compromise Agreement.

Employee has entitlement to statutory pay

Where an employee has an entitlement to any Statutory Payment, you may want to include this as part of the agreement. Statutory Pay (SP) is a legal entitlement and, if the qualifying conditions are met, your employee must receive that legal entitlement.

A Compromise Agreement may not mention SP entitlement at all, or use terms such as:

  • in lieu of SP entitlement
  • in recognition of SP entitlement
  • compensation for SP entitlement

This may not satisfy their entitlement or meet your obligation to pay.

It may simply refer to an overall settlement figure which aims to cover all your employee’s outstanding entitlements.

What to include in the agreement

To meet your requirement to pay SP, you must make sure that if you include payment of SP, you refer to the specific statutory payment eg Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP). You must also:

  • properly calculate your employee’s entitlement
  • clearly identify as SP in the agreement

Statutory Pay is subject to tax and National Insurance contributions (NICs) and you must make the relevant deductions when you make such payments to your employee.

Published 18 March 2014