Are you sure?

EXPERT OPINION: Mutual agreements in focus

written by Dr. Levente Csengery and dr. Dániel Gera

 

Employment law has been enjoying a renaissance since the credit crunch. For example, redundancy remains a hot issue for companies and we believe that this will continue in to the future. We do not think that hiring, and especially firing, will ever lose even a tiny bit of its importance. The subsequent financial crises and the companies’ reactions have just brought a brighter light on the issue.

Even though there are ever more declarations that an upswing in the economy might be seen, lots of companies are still desperately seeking cost-optimizing and cost-efficient restructuring methods to avoid being less dependent on the market. Reconsidering the status of the employee workforce and following redundancy programs seem to be the first solutions in many cases in HR-directed restructurings.

Our experience shows that, no matter the size of the organisations, employers always look to redundancy procedures as one of the most important and sensitive elements of cost-cutting and restructuring procedures. They know that a mismanaged program or protocol (i.e. unlawful termination) can cost fortunes and shatter reputations easily and utterly.

Considering the burdensome consequences of an unlawful termination (e.g. reinstatement, unpaid salary until the final and binding judgment, 2–12 months’ average salary as a ‘penalty’ correlating to the extent of the unlawful action of the employer, late interest, damages, etc.), as well as the employee-friendly approach of the respective labor courts, any termination served by the employer must be lawful and well-prepared. So in any termination case, preparation and control over the process are prime factors; ‘prevention is always less expensive than restitution.’

It will come as no surprise that one of the best methods to avoid costly and extended labor law litigation is concluding a mutual agreement on the termination of the employment relationship with the employee; it is often the most obvious choice for many parties. In many ways it is indeed the most convenient way to terminate the employment relationship for both parties.

A mutual agreement is usually simple, flexible and effective - apart from the written form, the Hungarian Labor Code does not stipulate specific provisions regarding termination by mutual agreement. The parties are therefore free to set out the relevant terms of the termination, such as its effective date, the amount of severance pay due to the employee, the compensation for outstanding holiday leave, etc.

Mutual agreements also have “psychological” advantages: they undoubtedly represent an amicable way of terminating the employment relationship; they can successfully hide the real reasons for the termination and resolve any conflicts associated with it. For example, they allow employees to avoid facing tough situations at subsequent job interviews when asked why they left the previous job, and employers may also rest assured that their goodwill will not be adversely affected. A further advantage of mutual agreements is that it is difficult to successfully challenge them in court subsequently.

However, the flexibility of this instrument does not mean “100% safety” either. Firstly, the nature of such agreements requires the parties’ cooperation and good faith, and they can only fulfil their mission if there is indeed an agreement behind them. While the real agreement behind the signed mutual agreements is missing, conflicts can easily arise. These conflicts may eventually also affect the validity of the mutual agreements.

We have recently seen that the disclaimers and waivers usually included in mutual agreements – especially those in which employees waive their right to challenge the agreement in court – may not always prevent them from doing so, and more importantly the courts may easily consider such clauses as invalid as soon as an element to successfully challenge the agreement (error, threat, duress) is sufficiently proven by the employee.

At the same time, it must also be mentioned that in order to successfully challenge such a mutual agreement, parties must be able to prove that (i) they were mistaken when signing the agreement and that (ii) such a mistake was caused or could have been recognized by the other party; (iii) both parties were under the same mistaken assumption, or (iv) the concerned party’s consent was obtained illegally by threat or duress. A valid and legally well-founded disciplinary or other measure may not be considered as an illegal threat.

Another common mistake concerning the conclusion of mutual agreements is that the parties often agree to terminate the employment by mutual agreement orally, and to arrange the paperwork later. This approach could also represent a serious risk. If the parties fail to conclude a written agreement later on, then in the absence of the required written agreement, an oral agreement may be considered as an unlawful termination, and for the violation of this requirement it is almost exclusively the employer who is held liable.

To avoid such costly – but unfortunately typical – mistakes, before concluding a mutual agreement we usually suggest seeking legal advice from an attorney specialised in employment law, even in the most straightforward cases.If you are interested in mutual agreements and the legal aspects of the termination of employment relationships in more detail, you may wish to attend the seminar held by attorneys from Gide Loyrette Nouel on 6 May 2011.

For further information, please contact the Employment team at gln.budapest@gide.com.

NOTE: ALL ARTICLES MARKED EXPERT OPINIONS are paid promotional content for which the Budapest Business Journal does not take responsibility.

This article appeared in the BBJ's HR special edition on April 8, 2011.