Mutual termination: unemployment benefits, severance pay and risks for employee and employer

A mutual termination occurs when the employee and the employer agree to end the employment contract without the risks associated with a disciplinary dismissal. It offers benefits for both parties, but it also involves significant risks for each of them.

What is a mutual termination?

All employees have the right to terminate their employment relationship with the company that employs them. This is known as voluntary resignation. The drawback is that it involves giving up both severance pay and entitlement to unemployment benefits.

Employers, for their part, may also dismiss employees if they deem it appropriate. Leaving aside cases that may be considered automatically unfair due to the violation of employees’ fundamental rights, employers can rely on dismissal for objective reasons or disciplinary grounds. However, if the dismissal is found to be unfair, they may be required to pay substantial compensation.

A mutually agreed dismissal represents a middle ground. It generally occurs when neither the employee nor the employer wishes to continue the employment relationship, but neither wants to face the disadvantages of voluntary resignation or disciplinary, objective or justified dismissal.

In these cases, the employee and employer sit down and negotiate the terms of the termination. This allows the employer to save a certain amount of money on compensation and avoid the risk of legal proceedings, while the employee retains the right to claim unemployment benefits.

Types of mutual termination

Broadly speaking, there are two types of mutual termination, which differ depending on whether or not severance pay is included:

• Mutual termination with severance pay: this is usually carried out on objective grounds and generally involves severance pay equivalent to 20 days’ salary per year of service, up to a maximum of 12 months’ pay. However, since both parties must agree to the termination, the amount is often lower.
• Mutual termination without severance pay: this is usually disguised as a disciplinary dismissal. It is often viewed as a favour granted by the employer when it is the employee who wishes to end the employment relationship.

When a disciplinary dismissal is used as a form of mutual termination, poor performance is usually cited as the reason. To make this easier to demonstrate, it is not uncommon for the employee to stop attending work. However, this must still be proven and, before proceeding with the dismissal, the employee must be warned and given an opportunity to improve.

What does a mutual termination cover?

Regardless of whether severance pay is agreed, the employee is entitled to receive their final settlement, which includes any untaken holiday entitlement, unpaid overtime, salary owed for the current month, and any other outstanding payments.

In addition, as we will explain later, a mutual termination may also entitle the employee to claim unemployment benefits.

But is a mutual termination legal?

A mutual termination is neither legal nor illegal as such, since it is not specifically recognised by the Workers’ Statute or by employment law in general. Therefore, the key requirement is to ensure that the employee’s rights are not infringed and that they fully understand what they are signing. Clearly, there must be no pressure, coercion or deception involved.

In this regard, a mutual termination with the employer must be entered into voluntarily by both parties and formalised in writing. Not through a document stating that the termination has been mutually agreed, but rather through the settlement agreement and any severance payment that may apply.

Mutual termination and unemployment benefits

A mutual termination may give rise to entitlement to unemployment benefits, as is the case with all forms of dismissal, including disciplinary dismissal. In fact, this is its main advantage for employees compared with voluntary resignation, which is why many seek to reach an agreement before leaving of their own accord.

Imagine an employee who wants to make a career change and prepare for civil service examinations. However, they believe that if they continue working, they will not have enough time to study properly.

In this situation, they legally have two options: request a leave of absence or resign voluntarily. The problem is that, in either case, they would stop receiving income, yet they still need money to pay for training courses and support their family. As a result, they may speak with their employer and ask to be dismissed, waiving severance pay but retaining the right to claim unemployment benefits for up to two years.

How does the SEPE identify a mutual termination?

What is particularly important is that the SEPE (Spanish Public Employment Service) may regard the situation described above as fraud against the public administration. In fact, it has a strict procedure in place to verify that a mutual termination is not simply a disguised voluntary resignation.

In recent years, the SEPE has paid particular attention to disciplinary dismissals. Since these do not involve severance pay, they are often viewed with suspicion as a potential cover for voluntary resignations. For this reason, it is essential that the dismissal letter is properly documented and justified, and that the entire process has been carried out in accordance with the law.

So, how do you negotiate a mutual termination?

The first step is always to approach the employer and express the wish to agree a termination. In general, having a long period of service and a strong employment record tends to work in the employee’s favour. Offering flexibility regarding departure dates and training a replacement can also demonstrate goodwill and make the employer more willing to agree.

However, under no circumstances should anything be signed without expert legal advice, as this may involve waiving future rights, including the possibility of challenging the dismissal if the employer fails to comply with the agreed terms.

In any event, reaching an agreement is always preferable to attempting to force a dismissal by, for example, deliberately reducing performance or failing to attend work. Why? Because employers have disciplinary measures at their disposal, such as suspension without pay or financial penalties. They may even take legal action against employees who fail to meet their contractual obligations or if they suspect a disguised voluntary resignation.

Risks for the employee and the employer

Since a mutual termination exists in a legal grey area (neither expressly legal nor illegal), both parties assume certain risks when entering into such an arrangement:

• The employee: risks the SEPE determining that the arrangement is actually a disguised voluntary resignation and therefore denying entitlement to unemployment benefits.
• The employer: even where the dismissal has been agreed, the employer remains exposed to the risk that the employee may subsequently challenge the dismissal before the courts. This is particularly sensitive where a disciplinary dismissal has been used, as it does not involve severance pay.

At this point, it is clear that both the employee and the employer require legal advice before proceeding with a mutual termination. Only in this way can the potential risks assumed by both parties be properly managed and minimised.