Agreement on termination of employment – What should be taken into account?

A recent ruling of the Finnish Supreme Court is a great reminder for employers what is to be taken into consideration when entering into termination agreements with employees.

In general, the employer and the employee may, at any time during the employment relationship, mutually agree to terminate the employment relationship. Freedom of contract applies and a mutual termination agreement is, per se, a valid and legally binding agreement, if the agreement in concluded appropriately. Termination agreements may be considered useful means for the parties to an employment relationship (especially for the employer) in order to avoid any subsequent claims or disputes.

In the Supreme Court ruling (KKO 2019:76), a termination agreement was made on employer’s initiative during the employment. Under the agreement, the employment terminated due to a resignation of the employee. The employer initiated the termination procedure by inviting the employee to a meeting, but the employee was not informed of the purpose of the meeting. When the meeting began, the employee was given a termination agreement and the employer insisted that employee would either accept or reject the agreement during of the meeting. The employee was not given the possibility to legal assistance before entering into the agreement. The Supreme Court ruled that the agreement was entered into under circumstances that would make it incompatible with honour and good faith to invoke the agreement.

Something to learn from the ruling?

In order to avoid similar arguments and to ensure that the termination agreement is legally binding, at least the following should, according to the Supreme Court ruling, be kept in mind:

1) The employee should always be given a reasonable time to consider the termination agreement before signing it. The employee should sign the agreement of their own will and without being pressured by the employer.

The Supreme Court reasoned that a two-hour meeting, taking into consideration the circumstances in question, was insufficient. The employer should have either informed the employee in advance of the purpose of the meeting and give the draft agreement for the employee before the meeting, or alternatively, provide the employee a reasonable time for consideration before signing the agreement.

2) The employee should always be given an opportunity to use assistance.

The Supreme Court reasoned that especially the fact that the employee was not given the opportunity to obtain outside assistance when making the decision to accept the agreement was crucial.

3) The agreement should always be made in written form.

Sometimes it is also useful to expressly state in the termination agreement that the employee has had the possibility to seek legal advice and assess the consequences of the agreement, and in any event, ensure that this has been done in practice.