Insights | September 19, 2019

The good, the bad and the ugly – termination agreement practices in Finland

Last week, the Finnish Supreme Court delivered a new judgement KKO: 2019:76 on agreements terminating employment relationships. In the relevant case, the Supreme Court declared a termination agreement between an employer and an employee to be null and void, holding that the termination agreement was signed in circumstances in which it was contrary to good faith and fair dealing to invoke the agreement. The employer was therefore ordered to pay compensation for unlawfully dismissing the employee.

Unequal positions

The outcome of this case is in line with the practical advice we give to clients. An employer and an employee are not in an equal bargaining position when they negotiate a termination agreement. Offering the employee a bad deal and forcing them to agree to it can easily backfire. The situation as a whole and an employee’s statutory rights must be taken into account when the agreement is offered. In this case, the employee agreed to a one-month notice period and severance pay equal to four (4) months’ salary. The employee’s statutory notice period was six (6) months. Consequently, accepting a termination agreement was clearly less favorable to the employee than if the employer had unilaterally terminated his employment in accordance with the statutory notice period (i.e. five (5) months’ salary versus six (6) months’ salary). Signing the agreement must be voluntary from the employee’s perspective. Otherwise, the termination agreement may be declared null and void, as the case demonstrates.

Exploring good practices

Contrary to the approach adopted by the employer in this case, good practices for offering a termination agreement to an employee can be summarized as follows:

–  give the employee sufficient time to consider the agreement and do not sign the agreement during the meeting at which it is first offered;

–  hand over the draft termination agreement to the employee and let him/her consider it at home for a day or two;

– take into account the employee’s statutory rights (such as salary during the notice period and unused but accrued vacation days) – do not try to agree on anything less favorable than that to which the employee is entitled at the time of termination of the employment;

– respect the other party without giving in – it is likely that the decision is much more significant for the employee than it is for you as a representative of the employer.

Link to the court case: