News & Insights

Dismissal or Mutual Agreement?

Does a dismissal letter override a mutual agreement to end an employment relationship – and, if so, what are the consequences?

After two years of continuous employment, an employee acquires the right to not be unfairly dismissed. For a dismissal to be fair, the employer must show that one of the five potentially fair reasons for dismissal applies, that the employer acted reasonably in dismissing the employee for that reason, and that the employer followed a fair dismissal process.

However, one of the elements of an unfair dismissal claim that can easily be assumed or ignored is that the employee must actually have been dismissed in the first place. Under the Employment Rights Act 1996 (ERA), there are three categories of dismissal:

  • Termination by the employer.
  • Expiry of a fixed-term contract.
  • Constructive dismissal – where there is a repudiatory breach of the employment contract by the employer, and the employee resigns in response to that breach – you can read more about constructive dismissal here.

For the purposes of an unfair dismissal claim, there will be no dismissal where employment is terminated by the mutual agreement of the parties.

In Riley v Direct Line Insurance Group plc, Mr Riley was employed by Direct Line in March 2012. Between 2014 and October 2017, Mr Riley was absent from work due to anxiety and depression, but he continued to receive 80% of his normal pay for much of this period under a private health insurance scheme operated by Direct Line. Mr Riley attempted to return to work, but he went off sick again in May 2018.

At a meeting held on 31 August 2018, Direct Line suggested that Mr Riley’s employment cease, but that he continue to receive payments under the private health insurance scheme. Mr Riley in principle agreed to this offer, subject to further research into the benefits afforded by the scheme. Following confirmation that Mr Riley would receive payments under the scheme until state pension age, a final meeting took place on 19 September 2018 to terminate Mr Riley’s employment.

This was then confirmed in a letter dated 25 September 2018 – but, crucially, this letter informed Mr Riley that he was dismissed on grounds of capability due to his ill health, rather than that the termination of employment had been mutually agreed. Mr Riley brought claims before the Employment Tribunal, including for unfair dismissal.

The Employment Tribunal found that Mr Riley had not been “dismissed” for the purposes of his unfair dismissal claim, as his employment had not been terminated by Direct Line. Rather, the termination of his employment had been mutually agreed at the meeting on 19 September 2018. On the facts, it appeared that Mr Riley had actively pursued the option of continuing to receive payments under the private healthcare scheme, and that he had agreed to the termination of his employment in order to take advantage of that option. The Tribunal dismissed Mr Riley’s unfair dismissal claim, and he appealed to the Employment Appeal Tribunal (EAT).

The EAT set out the importance of properly considering all of the facts and circumstances of a case of “mutual agreement”, in order to determine whether the termination of employment was truly consensual, and not tainted by deceit, coercion, or undue pressure. They also highlighted the distinction between an employee who consents to termination of his employment, and an employee who consents to being dismissed by his employer (as with a voluntary redundancy scenario, which is a dismissal).

On the facts, Mr Riley had not been deceived or coerced in any way, and he had been a willing and proactive participant in discussions regarding the termination of his employment, during which time he was given time to reach a decision. There was nothing to suggest that Mr Riley did not understand what he was doing. The fact that Direct Line had called the meeting of 31 August 2018 to discuss the issue did not automatically mean that this was a dismissal, and while the use of “dismissed” in the letter was a poor choice of words, the EAT considered the substance of the letter made it clear that Mr Riley’s termination had been mutually agreed. The EAT therefore held that the Tribunal had been justified in dismissing Mr Riley’s unfair dismissal claim.

While the termination of employment in this case was considered to be mutual, employers should take care when seeking to agree a consensual end to employment in similar scenarios, lest they risk an unexpected unfair dismissal claim. It is important to ensure that the employee is not being pressured or coerced into agreeing to any such termination, and to give the employee the opportunity to consider their options and to properly engage in discussions. Of course, a good way to mitigate the risk of a claim is to put a settlement agreement in place.

If you would like advice on terminating an employee’s employment or if you need assistance with preparing a settlement agreement, then please get in touch at [email protected]