How can an employer end an employment relationship by agreement without later claims

How can an employer end an employment relationship by agreement without later claims

This article examines the ending of an employment relationship by agreement and the related legal risks, particularly in the light of the Supreme Court's decision KKO 2019:76. In that decision, a termination agreement was held invalid under Section 33 of the Contracts Act, because the employee had not been given sufficient time to consider the matter or the opportunity to obtain expert help. The Supreme Court emphasised that, although the procedural provisions of the Employment Contracts Act do not formally apply to termination by agreement, they can be used as a point of comparison when assessing whether the circumstances of concluding the agreement were appropriate. The decision shows that the sufficiency of the consideration period is context-dependent: the more extensive the waiver of the employee's statutory rights and the greater the financial exposure, the longer and more structured the consideration period must be. In addition, an unexpected invitation and the absence of an opportunity to prepare weaken the freedom of decision-making. The article sets out an operating model serving the employer's risk management, comprising advance notice, appropriate negotiation, a sufficient consideration period, substantive balance and careful documentation. With these procedural safeguards, the risk that a termination agreement is held invalid, or that the ending of the employment is assessed as an unfounded dismissal, can be reduced.

The decisive significance of the consideration period and procedure in the light of KKO 2019:76

Ending an employment relationship by agreement is, as a starting point, permitted. In accordance with the principle of freedom of contract, an employer and an employee may agree to end the employment without a notice period and regardless of whether either party has grounds for dismissal or summary dismissal. The criteria for assessing the binding nature of the agreement are not then based on the Employment Contracts Act, but on general principles of contract law and the provisions of the Contracts Act.

KKO 2019:76 and Section 33 of the Contracts Act

In the Supreme Court's decision KKO 2019:76, a termination agreement was found invalid under Section 33 of the Contracts Act. In the case, the negotiation held at the employer's initiative lasted only about two hours, without advance notice, a sufficient consideration period, or the opportunity to obtain expert help. The Supreme Court stressed that, although the procedural provisions of the Employment Contracts Act do not formally concern termination by agreement, they can be used as a point of comparison when assessing the appropriateness of the negotiation circumstances. The purpose of the procedural rules is to safeguard the employee's access to information and to balance the negotiating position. The Supreme Court emphasised that termination negotiations inevitably involve an informational asymmetry: as the party taking the initiative, the employer has had the opportunity to weigh its objectives and alternative courses of action in advance, whereas the employee has to assess the matter only after hearing the employer's proposal. For this reason, the employer may be required to arrange the circumstances of concluding the agreement so that the employee, too, has available a sufficient consideration period and other appropriate conditions to assess the significance and terms of the agreement before committing to it (paragraphs 11–15).

Content requirements for the consideration period

In the Supreme Court's decision, the sufficiency of the consideration period was not tied to any fixed measure in hours or days, but was assessed specifically in relation to the circumstances at hand. The Supreme Court noted that A had, in about two hours, been required to take a position on ending an employment relationship after 16 years, and to assess alternatives, one of which was the agreement offered by the employer for compensation corresponding to four months' pay, and the other a dismissal by the employer, for which there were, however, no lawful grounds (paragraphs 17, 24, 31). This required, according to the Supreme Court, "considerably demanding" deliberation and a comparison of both the legal and the financial effects (paragraph 31).

The Supreme Court further emphasised that the contract negotiations had come as a surprise to the employee, and that he had not had the opportunity to prepare or to obtain expert help (paragraphs 18, 32–34). It was also decisive that no consideration period had been offered outside the employer's presence; the only break had been used for short telephone conversations (paragraphs 27–29, 32). On the basis of these factors, the Supreme Court held that a consideration period of about two hours was clearly insufficient. The decision therefore shows that the sufficiency of the consideration period is always assessed in context: the more extensive the employee's waiver of statutory rights (pay for the notice period, compensation under Chapter 12, Section 2 of the Employment Contracts Act, other claims), the more uncertain the employer's grounds for dismissal, and the more significant the employee's financial effects, the longer and better structured the consideration period should be. In addition, the Supreme Court showed that safeguarding the opportunity to prepare, for example through advance notice and the provision of a draft agreement, is an essential part of an appropriate procedure (paragraph 34).

In the light of the Supreme Court's decision, the length of the consideration period can be regarded as context-dependent: the more extensive the waiver (of pay for the notice period, of compensation under Chapter 12, Section 2 of the Employment Contracts Act, of other claims), the more uncertain the employer's own grounds, and the greater the employee's financial exposure (age, years of service, employment prospects), the longer and more structured the consideration period must be. In addition, the Supreme Court emphasised the significance of preparation: an unexpected invitation weakens decision-making, whereas advance notice and the provision of a draft agreement beforehand improve the balance.

The significance of evidence and the burden of proof

In the decision, the Supreme Court did not formally shift the burden of proof to the employer, but in practice the employer, who holds the documents and controls the process, bears the risk. The dissenting opinion in the Court of Appeal raised the idea that even a slight preponderance of evidence in the employee's favour may suffice when the accounts conflict and the circumstances point to pressure. This underlines the employer's obligation to produce a comprehensive "procedural package" showing that the agreement was concluded genuinely voluntarily and on an informed basis.

Summary

KKO 2019:76 confirms that a termination agreement can be valid only if it meets high procedural quality criteria. The employer must ensure advance notice, a sufficient consideration period, a genuine opportunity to seek advice, substantive balance and careful documentation. This makes it possible to minimise the risk that the agreement is held invalid under Section 33 of the Contracts Act, or that the ending of the employment is assessed as an unfounded dismissal, which could lead to significant later claims.