MUTUAL AGREEMENT TO TERMINATE A CONTRACT OF EMPLOYMENT

It is accepted at law that if an employment relationship can commence by agreement, its termination can also result from an agreement between the parties. Our Statutory law recognises mutual agreements as one of the methods of ending employment relationships. The legal principles applicable in such separations will be discussed in this article. Case law from South African and Zimbabwean courts will be used to illustrate the far-reaching consequences of such terminations.

Introduction

Statutory Provisions

It is accepted at law that if an employment relationship can commence by agreement, its termination can also result from an agreement between the parties. Our Statutory law recognises mutual agreements as one of the methods of ending employment relationships. The legal principles applicable in such separations will be discussed in this article. Case law from South African and Zimbabwean courts will be used to illustrate the far-reaching consequences of such terminations.

The statutory provisions that provide for mutual separations include Statutory Instrument 15 of 2006 and Labour Amendment Act, 2015. Collective bargaining agreements for various industries also provide for mutual separations.

Statutory instrument 15 of 2006 (The National Employment Code), on clause 5 (c) states that:

“No employer shall terminate a contract of employment with an employee unless — the employer and employee mutually agree in writing to the termination of the contract”.

In addition, the Labour Amendment Act, 2015 on section 12 (4) reads;

“No employer shall terminate a contract on notice unless;

a….

b. the employer and employee agree to mutually agree in writing to the termination of the contract.”

What is common in these provisions is that a mutual agreement to terminate an employment contract should be in writing all the time. Verbal agreements are null and void. It also follows that since this is a mutual agreement both parties should show that they agree to the terms contained in their document. In normal situations, both parties sign the agreement in the presence of witnesses.

Legal Implications

Mutual Separation as a waiver of rights

Several legal ramifications emanate from mutually agreeing to the termination of a contract. In the first instance, a mutually agreed termination overrides all other rights that an employee might have in terms of the law. Once it has been agreed, no party can renege on the terms and conditions in the document that constitutes the agreement. In recognising the fact that mutually agreed terminations have such an effect, the court in Lawrence Shumbayaonda v Madhatter Mining (Private) Limited[i] remarked:

“If he was entitled to cash-in-lieu on three months’ notice why would he signed an acknowledgement of debt of a lesser amount? In my view this shows that the parties agreed to terminate mutually their relationship. Plaintiff waived his rights and agreed to leave the employ of the defendant on the terms set out in their discussion. He is not entitled at this stage to claim that which he renounced and expressly signed away”.

In Gauntlet Security Services (Pvt) Ltd. v Hlabangani[ii] the employer and the employee agreed to mutually terminate their employment relationship.  After concluding the agreement, the employee went on to pursue a legal route in a bid to get more money from the employer. The courts failed to support such mischief in the following terms:

“If that is the case, he is entirely to blame for having misled Gauntlet Security into believing what he intended it to believe that is to say that the contract of employment was being terminated by mutual agreement. He must have known that he was not entitled to the payment of the money he received as terminal benefits without the contract of employment having been terminated in terms of agreement embodied in the document that he signed.”

It thus becomes crucial that parties contemplating a mutual termination of a contract incorporate all the terms of their agreement in the document that governs their separation. The net effect of such a document is that it cannot be set aside arbitrarily. Once parties agree, they are bound by the terms of the agreement even though these terms can be onerous in some instances.

Mutual Separation not equivalent to a retrenchment

A mutual agreement to terminate a contract is not equivalent to a retrenchment exercise. In Nei Zimbabwe (Private) Limited v Zane Brown and 10 Others[iii] the employees agreed to mutually separate with the employer after a change of shareholding structure of the company. The employees entertained the view that indigenous shareholders cannot properly run an organisation. The employer tried, to no avail, to convince these employees that a change in Shareholding structure does not change the management of the company. The employees remained adamant and separation was inevitable. The employees were paid some monies and left the employers premises. A few months down the line, the ex-employees decided that their separations where not properly executed. They demanded more money arguing that theirs was supposed to be a retrenchment. This argument was not supported by the court which in turn concluded:

The employees wanted to terminate their employment with the appellant, that was their prerogative, but they were not entitle to retrenchment packages in terms of section 2 of the Act and the Regulations. The employer offered them some payment, which I might add, it was not obliged to pay in terms of the law. The employees accepted the payment offered. They received the payment and resigned, squandered the payment and now claim that they are entitled to more money or re-instatement in terms of the Act. That claim is not sustainable”.

When an employer and an employee agree to mutually terminate their employment relationship this cannot be construed as a retrenchment exercise. According to the court in this case, the definition of a retrenchment is clear to the extent that the circumstances did not warrant the inference that a retrenchment exercise had been carried out. This point is best illustrated where the court indicated:

“That is to say retrenchment means termination of an employee’s employment for the purpose of reducing expenditure or costs. The termination of employment in casu was not for the purposes of reducing expenditure or costs. Retrenchment also means termination of employment for the purposes adapting to technological change. Again, termination in casu had nothing to do with technological change. Retrenchment can also be effected for the purposes of reorganizing the undertaking in which the employee is employed”.

The clear distinction made by this court doesn’t need further explanation. When a mutual termination has been executed it cannot be deemed to be a retrenchment.

Mutual Separation and unfair dismissal

The other legal implication of a mutual separation is that once it has been concluded no party can successfully raise claims of unfair dismissal. In a South African matter between Ferguson v Basil Read (Pty) Ltd[iv] the court noted that when a claimant enters a mutual separation with “open eyes”, meaning that deception did not obtain, the question of dismissal will be farfetched. This court conclusively remarked:

“The applicant entered into a termination agreement with the respondent in full and final settlement of any disputes arising from his employment. He did so voluntarily, waiving the opportunity to engage in a consultation process in which he could have requested the respondent to consider alternatives to dismissal, such as future employment at the Saldanha project once it commenced. He was not induced to enter into the agreement by misrepresentation. Hence, he was not dismissed”.

It is submitted that dismissal is one of the several ways in which a contract of employment can cease to exist. Mutual separation is a different method altogether. There are instances where the two coincide for instance were a retrenchment is contemplated and in the process, parties end up ending the relationship by mutual agreement i.e way before finishing the retrenchment. What is crucial to note is that once the mutual agreement is concluded on, no one can escape its consequences unless allegations of fraud and misrepresentation become apparent.

Invalid mutual separations agreements

What makes mutual separations valid is the presence of consensus between the parties. This means that in the absence of this consensus a mutual separation agreement is voidable at the instance of either party.

Misrepresentation, fraud and duress are some of the things that render a mutual separation invalid. These acts have one thing in common. They result in the absence of consent between the parties to a separation agreement. The resultant agreement will not bind the parties.

Conclusion

Those contemplating a mutual separation should ensure that they are well versed with the principles discussed in this article. As noted, this type of separation has far-reaching consequences including a waiver of rights. It is advisable that when one is presented with such an agreement, they take time in scrutinising all the terms mindful of the fact that once the agreement is in effect there is no going back!

SOURCES:


[i] Lawrence Shumbayaonda v Madhatter Mining (Private) Limited (HH 147-2010)

[ii] Gauntlet Security Services (Pvt) Ltd. v Hlabangani (SC 51/02)

[iii] Nei Zimbabwe (Private) Limited v Zane Brown and 10 Others (SC 84/04)

[iv] Ferguson v Basil Read (Pty) Ltd (ZALCCT 38)

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2 thoughts on “MUTUAL AGREEMENT TO TERMINATE A CONTRACT OF EMPLOYMENT”

  1. My employer has been renewing my contract of employment since 2017. Am i not entitled to be permantly employed as stated by the labour relations act? i have been employed on contract in the same position since then.

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