An employment contract may be terminated on mutual understanding between the employee and the employer. Concluding such agreement is voluntary for both parties. The law does not regulate the form of termination agreements but such agreements should always be done in writing.

It is important to thoroughly read through the agreement on the termination of employment and examine it with a lawyer before signing it. For the employee, it is important to clarify the consequence of the conditions of such agreement and its impact on one’s unemployment security, among others. The employee has to be provided with reasonable time to get acquainted with the conditions of the agreement.

The parties to the agreement have to be clearly recorded in the agreement. The agreement often also includes the employee’s first day of employment and his or her most recent tasks and duties. The agreement often includes a summary of conditions that have led to the agreement on the termination of employment.

Waiver of claims and severance compensation

The parties typically agree that they shall not have, after completing the termination agreement, any claims towards one another, based on the employment contract or its termination. For example, after signing the agreement the employee shall no longer challenge the termination grounds of his or her employment contract. Waivers of claims is typically one reason why employers want to conclude such agreements.

In the termination agreement, the employee’s severance compensation shall be agreed upon. The agreed sum and the payment date shall be clearly recorded in the agreement. It is important to determine the correct level of the severance compensation. Legality assessment is one of the determining factors, i.e. whether the grounds for terminating the employment were legal or illegal. Other pertaining factors include, among others, the duration of the employment relationship and the age of the employee.

Only withholding tax and social security contributions are withheld from the severance compensation, and no pension is accrued. It is advisable for the employee to contact the tax authorities for the possible eligibility to income spreading, as stipulated in the Income Tax Act.

The agreement may also include clauses on possible outplacement service provided by the employer. In such cases, the agreement shall clearly indicate the contents of such benefit.

Termination of the employment relationship

The termination date of the employment relationship shall be correctly recorded in the agreement. Usually the employment relationship terminates at the end of the period of notice. The parties may also agree that the employment contract is terminated with immediate effect, or at a later date. Shortening the notice period is rarely in the interest of the employee. If the employment relationship terminates at the end of the notice period the parties should agree whether this period is used for the employee’s annual leave, or whether he or she is just freed from the obligation to work. In that case, the accrued annual leave shall be compensated as holiday compensation.

Even if the employee is freed from the obligation to work, he or she is entitled to the normal pay and accrual of annual leave during the validity of the employment relationship. The salary shall include possible fringe benefits or their monetary equivalent.

Breakdown of final salary

It is advisable to specify all receivables from the employer to the employee in the termination agreement, including their payment date. The most typical employment relationship receivables include salary of the notice period, compensation for overtime, cost reimbursements such as travel expenses and various bonuses (provisions, bonuses, post-agreement commissions and option rights). The number of unused holiday days and the holiday compensation thereof should also be specified in the agreement. The payment of holiday bonuses shall also be separately agreed upon.

Other conditions

If the parties have agreed upon a non-compete clause, the agreement on the termination of employment does not automatically suspend it. Therefore, possible abrogation of the non-compete clause should be agreed upon in the termination agreement.

Termination agreements are always different and therefore have to be adjusted on a case-by-case basis. Other pertinent factors may be, among others, the employee’s right to accept another work immediately, return of the employer’s possessions, possible transfer of the mobile phone number to the employee as well as avoidance of expansion of obligations, contractual penalties or other sanctions.

The parties may agree that the employee will receive a positive certificate of employment to advance his or her re-employment on the date of termination of the employment relationship.

As for dispute resolution, the employee is advised not to agree on arbitration due to its high cost. The preferred option should therefore be dispute resolution in general courts.

The agreement affects your unemployment security

The termination agreement generally results in a 90-day suspension period during which unemployment benefits shall not be paid. The suspension period can be avoided only if the termination agreement had been offered to an employee who was, as a result of co-determination negotiations, chosen to be laid off under any circumstances. The TE Office always takes the decision on the waiting period.

The employee is not entitled to unemployment benefits during the the term of periodisation of the severance compensation. For example, a six-month severance compensation leads to an approximately six-month periodisation during which the unemployment fund does not pay earnings-related unemployment allowance. The possible 90-day waiting period shall elapse concurrently with the periodisation.

However, it is important to register as an unemployed jobseeker no later than on the first day of your unemployment. If you have not registered at the TE Office and you have been away from the labour market without an acceptable reason for more than 6 months, you will no longer be entitled to the earnings-related unemployment allowance. Severance compensation or independent jobseeking without registration as an unemployed jobseeker at the TE Office is not considered as an acceptable reason.

Please send your application for earnings-related unemployment allowance to your unemployment fund after two weeks of unemployment.