Bringing the Employment Relationship to an End by Mutual Agreement
A mutual termination agreement is a rescission contract by which the employee and the employer, combining declarations of intent that correspond with one another, set aside the employment contract in force. In legal character it is not a unilateral act of termination; it is an independent contract concluded between the parties that brings the employment relationship to an end by agreement. In that respect it is addressed within the framework of the principle of freedom of contract.
The most critical consequence of the institution is that there is no termination and that, as a rule, the route of a reinstatement action is closed off. The legal consequences that will arise must therefore be weighed with care before signature. Otherwise the employee may, without realising it, be deprived of job security and of certain employment claims; and the employer may, because of a mutual termination agreement held to be invalid, be exposed to the risk of litigation.
In this briefing note we address the legal character of the mutual termination agreement, its conditions of validity, the criterion of reasonable benefit, the settled approach of the Court of Cassation and its effect on proceedings.
The Concept of Mutual Termination
A mutual termination agreement is a rescission contract concluded by the parties to an employment relationship, through mutual and corresponding declarations, with the aim of bringing the existing contract to an end. By this route the parties set aside the continuing relationship by agreement.
In employment law, mutual termination is not regarded as a unilateral act of termination. The parties conclude a new contract and, by that route, set aside the employment contract in force. The institution is therefore assessed within the framework of the principle of freedom of contract, and mutual consent lies at its foundation.
The Legal Character of the Institution
Placed within the system of the law of obligations under the name of a rescission contract, mutual termination brings an existing contract to an end with prospective effect. The contract is set aside by the meeting of intentions; the provisions attached to termination find no field of application.
In this respect, mutual termination is an institution that produces consequences peculiar to employment law and that must be handled with care in practice.
The Point of Distinction from Termination
The basic distinction between the two institutions is gathered in the route by which the contract comes to an end.
- Termination takes place through a declaration of intent made by one of the parties alone.
- Mutual termination, by contrast, is the result of a contract concluded by the agreement of both parties.
Whereas the employer must rely on a valid or just cause in order to proceed to termination, in a mutual termination mutual accord is regarded as sufficient. Accordingly, where there is a mutual termination, the reinstatement provisions as a rule do not come into play.
Conditions of Validity
Although a mutual termination agreement is a rescission contract concluded by the agreement of the parties, it does not create an unlimited sphere of freedom in employment law. Because of the imbalance of power between the parties, the Court of Cassation subjects these agreements to close scrutiny.
For validity to be spoken of, the following conditions must be satisfied together.
Free and Clear Intent
A mutual termination agreement is concluded through mutual and corresponding declarations. Clear accord to bring the contract to an end is required.
The declaration of intent must;
- be clear in a manner that leaves no room for doubt,
- demonstrate that the employee genuinely embraced departure by agreement,
- not bear the appearance of a transaction that veils a unilateral termination.
These requirements must be met.
In practice it is observed that the texts are most often prepared by the employer and put to the employee for signature. That fact alone does not produce invalidity. What is decisive is whether the intent was declared freely and whether the reasonable benefit addressed below was provided.
The Provision of a Reasonable Benefit to the Employee
In the practice of the Court of Cassation, the most decisive criterion of validity is the condition of “reasonable benefit”. Together with the mutual termination, the employee;
- loses the possibility of bringing a reinstatement action,
- waives the job security provisions,
- in most cases is also deprived of the right to unemployment benefit.
For the contract to be treated as valid, the employee must therefore be offered an additional benefit over and above the entitlements they would in any event have obtained on an ordinary termination. In practice, a reasonable benefit most often takes the form of;
- a payment made over and above severance pay and notice pay,
- additional compensation,
- a payment in the nature of a bonus or incentive.
These are the forms it takes. Where the employee has been paid only the severance pay and notice pay already earned, it is accepted in most cases that this condition has not been satisfied and the contract may be treated as invalid.
Situations in Which Reasonable Benefit Is Assessed Differently
This criterion is not applied with the same rigour in every file. The assessment may differ in particular in the following situations:
- employees working under a fixed-term contract,
- those whose length of service has not completed six months,
- those falling outside the scope of job security, that is to say employees at workplaces employing fewer than 30 employees,
- persons who, at their own request, move to an objectively more advantageous position.
In addition, where the offer has come from the employee, the Court of Cassation may conduct the reasonable benefit examination more flexibly. Even in that event, however, whether a benefit was genuinely obtained from the contract is separately investigated.
The Absence of a Defect of Intent
For validity, the employee’s intent must not have been vitiated.
The contract may be treated as invalid in the following situations:
- pressure being exerted in the form of “if you do not sign, you will get no compensation”,
- the employee being threatened with immediate dismissal without compensation,
- the employee being misled by the provision of information contrary to the truth,
- psychological pressure being applied or coercive circumstances being created.
In situations of this kind the transaction may in reality be characterised as a termination and a reinstatement action may be brought.
Written Form and Proof
The legislation lays down no express requirement of written form for a mutual termination agreement. Nevertheless, drawing the contract up in writing is of great importance so that no problem of proof arises later on.
In disputes concerning the ending of the contract, the absence of a written document may give rise to serious difficulties of proof. Drawing the text up in writing and having it signed by the parties has therefore become a settled method in practice.
The Effect on the Employee’s Entitlements
Because a mutual termination agreement brings the employment contract to an end by mutual accord, it produces consequences for the employee’s entitlements that differ from those of a termination by the employer. The consequences must be weighed with care, particularly as regards compensation, reinstatement and unemployment benefit.
Severance Pay and Notice Pay
Since in a mutual termination the contract does not end by way of termination, severance pay and notice pay do not arise of their own accord; those claims are as a rule entitlements attached to termination.
In practice, however, mutual termination texts most often provide for;
- a payment equivalent to severance pay,
- a payment equivalent to notice pay,
- and alongside these, additional compensation or a supplementary payment.
Such provision is commonly made.
Where a valid mutual termination agreement exists and the text contains no provision concerning severance or notice pay, whether those claims may subsequently be sought may be assessed according to the content of the contract and the features of the case. How the text has been drafted is decisive for that reason.
The Right to Reinstatement
One of the most important consequences of the institution is the removal of the possibility of bringing a reinstatement action. The reinstatement provisions find a field of application only in terminations effected by the employer.
Where there is a valid mutual termination agreement, no termination has been effected by the employer and reinstatement cannot therefore be sought.
By contrast, where;
- no reasonable benefit has been provided to the employee,
- the signature was given under pressure,
- the transaction is in reality in the nature of a termination,
invalidity may be asserted and a reinstatement action may be brought.
Unemployment Benefit
An employee who leaves by way of a mutual termination agreement cannot as a rule draw unemployment benefit. The benefit is awarded on condition that the person has become unemployed independently of their own intent and fault.
Since a mutual termination rests on mutual agreement, it is in most cases characterised as “leaving of one’s own accord” and no entitlement to the benefit arises.
This consequence carries additional weight in the assessment of reasonable benefit. For if the right to unemployment benefit is being lost, the additional benefit offered is expected to be at a level that compensates for that loss.
Situations Giving Rise to Invalidity
This rescission contract, resting on mutual agreement, does not carry absolute validity in employment law. Because of the imbalance of power between the parties, the Court of Cassation reviews these contracts not only as to form but also as to substance.
In their assessments the courts take as their basis not the heading of the text but the parties’ genuine intent, the circumstances in which the contract was concluded and the benefit provided to the employee.
The contract may be treated as invalid in the following situations.
A Signature Given Under Pressure
At the foundation of the institution lies the free intent of the parties. Where the employee’s free will is absent, no genuine agreement can be said to exist.
The following situations in particular may constitute grounds of invalidity:
- a threat in the form of “if you do not sign, you will be dismissed without compensation”,
- pressure to the effect that disciplinary proceedings will be opened against the employee,
- the giving of misleading information as to entitlement to unemployment benefit,
- threats that the employee will be prevented from finding other work,
- offers presented as a continuation of ongoing mobbing.
In situations of this kind the Court of Cassation treats the contract as invalid on the ground of a defect of intent and may characterise the transaction as a termination by the employer.
Termination Under the Appearance of Mutual Agreement
Another picture frequently encountered in practice is that the employer gives the transaction the name of a “mutual termination” in order to eliminate the risk attaching to a termination.
The indicators that may point to the transaction being in essence a termination are as follows:
- the offer being brought forward entirely by the employer,
- no time being left to the employee for reflection,
- standard-form texts that cannot be altered being put before the employee,
- no possibility of negotiating over the content being afforded.
In such situations the court looks not at the name of the contract but at the actual position. Where the employer’s intent is in the dominant position, the transaction may be assessed as a termination.
The Failure to Provide a Reasonable Benefit
One of the criteria of importance for validity is that a reasonable benefit be offered to the employee.
Where only the severance pay and notice pay already earned have been paid and no additional benefit beyond that has been provided, the Court of Cassation may in most cases accept that this condition has not been satisfied.
The contract may in that event be treated as invalid and the transaction characterised as a termination by the employer.
The Aim of Circumventing Job Security
The courts also investigate whether the contract pursues the aim of circumventing the job security provisions.
In particular, mutual termination agreements made;
- during collective redundancy processes,
- during periods in which trade union activities are being conducted,
- during pregnancy,
- at times when performance disputes have intensified,
are subjected to closer scrutiny. Where the aim of the contract is to relieve the employer of the burden of proving the conditions for a valid termination, a conclusion of invalidity may be reached.
The Practice of the Court of Cassation
In the case law of the Court of Cassation these contracts are reviewed very closely, having regard to the imbalance of power between the parties. In their examinations the courts give weight not to the heading of the text but to the genuine intent, the circumstances of conclusion and the benefit provided to the employee.
The situations that come to the fore in the practice of the Court of Cassation as regards validity are as follows.
Texts Signed with a Reservation of Rights
The employee’s signing of the contract while entering a reservation of rights does not, in most cases, show that the parties genuinely brought the relationship to an end by agreement. Particularly in the case of an employee who expressly makes clear that they object to the text, it may not be possible to say that a genuine mutual termination exists.
Indeed, in one decision the Court of Cassation emphasised that the employee had signed the contract while entering a reservation of rights in the form of “my overtime pay has not been paid; this is signed subject to the condition of having recourse to the courts”, that no additional benefit had been offered to them, and that for that reason the existence of a valid mutual termination could not be accepted (Court of Cassation, 22nd Civil Chamber, 06.12.2017, Docket No. 2017/43888, Decision No. 2017/27868).
Agreements Concluded After Termination
According to the Court of Cassation, agreements concluded after the employment contract has been terminated by the employer are as a rule not treated as mutual termination agreements. For such a contract must be concluded with the aim of bringing to an end an employment contract that is still in force.
Accords reached on the consequences of a termination on the same day as, or within a short time of, an employer’s termination are therefore not regarded as being in the nature of a mutual termination (Court of Cassation, 7th Civil Chamber, 02.03.2016, Docket No. 2015/40050, Decision No. 2016/5101).
The Characterisation of a Request to Leave
In some cases the employee states that they wish to leave employment on condition that severance and notice pay are paid. The Court of Cassation does not always treat declarations of this kind as a resignation, and in certain situations assesses them as a proposal directed at concluding a mutual termination agreement.
Indeed, in one decision it characterised a request to leave that was made conditional on the payment of severance and notice pay not as a resignation but as an offer of mutual termination addressed to the employer (Court of Cassation, 9th Civil Chamber, 21.10.2020, Docket No. 2016/28074, Decision No. 2020/12770).
Subsequent Acceptance of the Employer’s Termination
Nor can the employee’s subsequent acceptance of a decision to terminate taken by the employer be characterised, in itself, as a mutual termination. For the conclusion of such a contract requires the parties to reach a mutual and new agreement.
In one decision the Court of Cassation stated that an employee’s notification that they accepted the employer’s decision to terminate could not be treated as a mutual termination, and that where no separate benefit was provided to the employee the termination could be held invalid (Court of Cassation, 9th Civil Chamber, 21.03.2017, Docket No. 2016/8081, Decision No. 2017/4648).
The Independent Legal Assessment
Properly constructed, a mutual termination agreement offers a predictable exit for both parties; carelessly prepared, it leaves the employer facing precisely the reinstatement action it wished to avoid. The focus of judicial review is not the heading of the document but the concrete benefit obtained by the employee and the freedom of their intent.
On the employee’s side, the monetary value of the entitlements being given up must be calculated before signature. An offer in which the possibility of reinstatement, job security compensation and unemployment benefit are not assessed together is most often less advantageous than it appears.
In a particular file we recommend that the following headings be given priority:
- Documenting through correspondence which party the offer came from and how the negotiation process unfolded
- Calculating whether the additional benefit offered genuinely constitutes a gain over and above statutory entitlements
- Recording that the employee was allowed time for reflection and that changes could be made to the text
- Setting out the sums to be paid item by item in the text, with their amounts
- Separately assessing periods requiring close scrutiny, such as collective redundancy, a trade union process or pregnancy
- Anticipating from the outset the consequences that signatures given with a reservation of rights will produce
Independent Legal advises throughout the whole of the process, from the preparation of agreements bringing the employment relationship to an end to the conduct before the courts of disputes founded on them.