Mutual Termination Agreement: Employment Relationships & More
Nowadays, mutual termination agreement (in Tr, ikale) which stands for a dissolving agreement originated from the Turkish Code of Obligations numbered 6098 (“TCO”) is used to describe the mutual agreements settled between the employee and the employer in order to dissolve the legal relationships established based on the Labor Code numbered 4857 (“Labor Code”). In both of the aforementioned codes, a special provision on mutual termination agreements does not exist; thus, the principle of freedom of contract shall be applied within the scope of TCO. Nevertheless, since mutual termination agreements are peculiarly used to contractually terminate employment relationships in practice, this article hereby aims to bring an explanation to mutual termination agreements with regard to employment agreements.
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What Are the Conditions for Establishment and Validity of a Mutual Termination Agreement?
Under Labor Code, the cases which constitute the “cancellation” of an employment agreement either by the employee or the employer are enacted in a limited fashion; thus, besides these such cases, an employment agreement cannot be canceled. In accordance with this, theoretically, a mutual termination agreement does not constitute the cancellation of an employment contract but it is a distinct legal institution that should be examined under the general provisions of TCO. Correspondingly, due to the mutual termination agreement being an agreement in the first place, the principal condition for the establishment of a mutual termination agreement is that both parties’ accord of wills. In other words, the employer and the employee should agree to terminate the contract without being liable by provisions on cancellation.
It should be highlighted that under Turkish law, there are no conditions for the validity of a mutual termination agreement. Nonetheless, as it is explained here below, with consideration of the delicacy of balance to maintain between the dynamics of employment relationships, it is advised to conclude mutual termination agreements in written form since it would be safer for both parties, especially in terms of disputes probable to arise.
What Are the Legal Consequences of Mutual Termination Agreement for Both Parties?
As mentioned before, a mutual termination agreement is not liable under the provisions on cancellation; hence, the employee shall not be entitled to social benefits anymore. In this regard, after the termination of an employment contract with mutual agreement, the employee shall not assert her claims on severance and notice pays as well as claims on reemployment, compensation for not re-engagement of the employee, and compensation for the duration in which the employee was not engaged in any duty. In addition, in the case of the mutual termination agreement, the employee shall not apply for other social benefits starting with the unemployment allowance. As it is seen, mutual termination agreement may not result in favor of the employee while exempting the employer from his duties.
Based on this very reason, pursuant to principles of maintaining the balance between employer and the employee, and the principle of interpretation in favor of the employee, there are some principles applied by the Turkish Supreme Court in order to protect the employee and alleviate the employers to go around their obligations regarding social security:
The first principle that the Supreme Court shall apply to the cases where employment contracts are terminated with the mutual agreement is the principle of reasonable profit. Accordingly, in the case where the employee terminates the employment contract with a mutual agreement, the employee should obtain a reasonable profit when compared to the cancellation of the employment agreement. Even though there is not a certain criterion for determination of the reasonable profit, in most cases Supreme Court seeks a financial profit in addition to the severance and notice pays.
It is for sure that the reasonable profit of the employee is not limited to financial profit; e.g., for an employee who is quitting for a better job for employee’s career, terminating the employment contract without waiting or paying for the notice may constitute a reasonable profit too. In this regard, the reasonable profit of the employee should be evaluated separately for each case.
According to the case-law of the Supreme Court, it is also highlighted that which party has initiated the offer to the mutual termination agreement and that the reasonable profit should exist for the party which made the offer. After the employment security provisions enter into force, the reasonable profit gained more importance in order to prevent the employers’ elimination of social security provisions through mutual termination of the agreement. In this sense, there are various Supreme Court decisions on the sufficiency of the payments of vested employee rights such as severance and notice pay and annual leave payment.
For instance, in the case where the employee who acted in a way that may cause the rightful cancellation of the employment contract by the employer makes the offer to the mutual termination agreement and claims only severance and notice pays, it could be concluded that the employee has the reasonable profit, as well. In cases where the employer makes the offer, on the other hand, it is seen that in addition to the severance and notice pays, the employer should also pay the compensation for not re-engagement of the employee which stands for 4 months’ gross wage.
At this point, our two given explanations on that “there is no condition for validity for the establishment of a mutual termination agreement” and that “the party which made the offer” is important for determining the reasonable profit, should be evaluated together. Hence, the Supreme Court’s interpretation of “employee’s demand for terminating the contract on condition of getting the severance and notice payments constitutes a proposal for mutual termination agreement instead of resignation” becomes important. In this case, even if the parties do not sign another contract, if the employer pays the claimed amounts and the employment contract is terminated, it does not constitute the cancellation of the employment contract by any of the parties but mutual termination agreement. Consequently, in such case employee shall not claim any other indemnities after the termination of the employment contract. Nevertheless, especially with consideration of defective will cases, the principle of interpretation in favor of the employee should be kept in mind.
Another principle that is established with Supreme Court’s case law is the agreement of wills as a validity condition. Accordingly, for the existence of a mutual termination agreement, Supreme Court looks for the condition that the employee understands the legal consequences of such agreement in consideration of the employee’s weaker position against the employer. While assessing that, social, cultural, and economic criteria such as education status of the employee or employee’s duty in the firm gain importance. At this point, whether the employee is adequately informed or not is a criterion applied by the Supreme Court during the assessment of the employee’s true will, as well.
May Mutual Termination Agreement and Release of Claims Replace Each Other?
Despite the fact that mutual termination agreements and release of claims are seen together within the employment relationships, we believe that it would be helpful to reveal the theoretical and practical differences between these legal institutions. Thereafter, in the first place, while the release of claims stands for the termination of a certain debt; mutual termination agreement indicates the termination of a certain legal action, i.e., the employment contract, from which the debt arises from. In fact, the legal provisions that these two legal institutions are subject to are different, as well. Likewise, while there is no specific provision regarding the mutual termination agreements, the release of claims is enacted under TCO. For instance, whereas Article 420 of TCO enacts the written form as a validity condition for the release of claims, there is no such validity condition for mutual termination agreement. Moreover, since the release of claims is not a mandatory document to issue regarding the labor law, it simply determines that a certain debt is executed. Following that, it should be noted that the debts settled with the mutual termination agreement can be subject to the release of claims.
Should Be Established in Written?
In addition, as it is explained in detail hereabove, since it may cause difficulties to prove the existence of the mutual termination agreement in case of a potential dispute, establishing it is written would be preferable for both parties. Under any circumstances, considering the obligation of written form for many documents arising from the Labor Code, it is clear that establishing an agreement that has significant consequences for the employment relationship in writing would be in favor of both parties. In addition, since employers are under the duty of keeping employees’ personal files, it would beneficial for employers to make the mutual termination agreement in a written form, too.
What Happens to Garnishee of Wages in Case of Mutual Termination Agreement?
There is no unity of practice or a specific legal provision on the situation of garnishees of wages in case of a mutual termination agreement within the scope of Article 355 of Enforcement and Bankruptcy Code (“EBC”). Nevertheless, mutual termination agreements do not terminate the employment claims and give rise to new claims. In other words, claims arising from mutual termination agreements are still employment claims. In accordance with that, garnishees on the wage of the employee and on the other employment claims in case of the termination of the employment contract should be still taken into consideration. Hence, it should be reminded that mutual termination agreements aiming to prevail third parties’ collection of debts will still constitute fictitious legal actions.
Is It Possible to Get Tax Refund in Case of Mutual Termination Agreement?
As explained, Supreme Court examines whether the employee obtains an additional profit or not, and in most cases, this additional profit stands for financial benefits other than benefits that the employee will be entitled to in case of the cancellation such as severance and notice pays, overtimes. Whether these additional profits can be considered as revenue, and hence, whether they can be subject to income tax under Tax Procedure Law numbered 213 (“Tax Procedure Law”) and Income Tax Law numbered 193 (“Income Tax Law”) becomes a question of debate.
Finally, with the provisional article added to the Income Tax Law on 18.01.2019, it is regulated that regarding the mutual termination agreements concluded before 27.03.2018 and the payments made under such agreements before that date, a tax refund may come to the fore. Respectively, the sole matter that may constitute subject to the tax refund is the aforementioned additional profit. To set an example, in the case where an employee obtained a payment equivalent to her three months’ salary in addition to severance pay, their payment equivalent to her three months’ salary will constitute the additional profit and only this amount will be the tax base. Notwithstanding its name, payments made to the employee after the mutual termination agreement up to the maximum severance pay that the employee is entitled to cannot be subject to the income tax; income tax is imposed only on the amount that exceeds the maximum severance pay.
It should be highlighted that if there is a pending or finalized lawsuit filed against the tax refund, applying to the relevant tax authority in order to demand a tax refund will be out of the question. Finally, it should be also emphasized that such claims for a tax refund will be asserted only within the 5 years after the payment of tax.
Stamp taxes constitutes another controversial taxation issue arising from mutual termination agreements since according to the Stamp Tax Code numbered 488 reveals that there are limited types of documents (agreements, settlements, annulments) that are subject to different rates of stamp tax. In this regard, even though a unified practice does not exist, it is seen that the common & up-to-date practice of tax authorities is applying 9,48‰ stamp tax over the sum amount agreed by parties since mutual termination agreement is considered as a new contract rather than other types.
Mutual termination of contracts, which is a legal institution with significant importance, is frequently applied in practice under the voluntary termination of employment relationships by parties. Due to its effects limiting the employee’s access to social indemnities, mutual termination agreements are often used by employers as a legal veil to go around financial burdens that may occur in case of cancellation of the employment agreement. Because of this, in practice, it is seen that Supreme Court applies certain principles such as the reasonable profit principle in order to protect employees’ rights. Thus, considering possible disputes that may arise between parties, to ease the proof of parties’ will of mutual termination, it is advised to make mutual termination agreements in writing, especially for the employers.
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