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Severance agreements: voluntarily entered into or in reality a dismissal from the employer?

In a recent ruling, Borgarting Court of Appeal has concluded that a severance agreement in reality was a summary dismissal from the employer. The circumstances surrounding the negotiations and the terms and conditions of severance agreements are decisive elements in the courts’ assessment of such agreements. It is important that the employer consciously informs the employee of his/her options and provides sufficient time for the employee to reflect.

Ill: grafitti

Severance agreements are a practical and common way of terminating employment relationship, thereby reducing the risk of a subsequent conflict. However, a recent ruling from Borgarting Court of Appeal states that the principle of reclassification also applies to severance agreements. Previous case law has applied the principle to the employee's own resignation. It is therefore not surprising that case law now has come to the same conclusion with regard to severance agreements.

The principle of reclassification under labour law applies where it appears to be the employee's choice to terminate the employment, but where the actual circumstances of the case imply that the termination is considered to be a dismissal with or without notice from the employer. The key question is whether the employee had an actual choice when entering into the severance agreement.

Notably, it is not a condition for such reclassification that the employee has been subject to direct pressure to sign the agreement or is threatened with dismissal. An overall evaluation must be made of the circumstances surrounding the conclusion of the termination agreement. If these circumstances jointly imply that the employee has been exposed to undue pressure, the severance agreement may be viewed as a dismissal with or without notice (depending on the time of resignation). This will be the case where the employee in reality had no other choice than to resign, be dismissed or to accept a severance agreement.

The Court of Appeal mentions several factors that are relevant in this assessment, including whether the employee was informed that there was an actual choice to continue the employment, information of the consequences of entering into the severance agreement, any time pressure for signing the agreement and lack of opportunity to consult with others.

In this particular case, the employee had not received any information in advance about the subject of the meeting she had been invited to. As such, she was taken by surprise when the employer expressed that it was decided that the best solution was to go separate ways. She was thereafter handed a severance agreement. The Court of Appeal maintains that in practice she was not given enough time to reflect or consider, and she was not given the opportunity to speak to an adviser. Although she was not explicitly denied time for reflection, or to contact an adviser, she was handed a pen to sign the contract, with an expectation to sign immediately. She was also informed that there was no room for negotiation, and that she had to make a decision on the severance agreement during the meeting.

The Court of Appeal further emphasized that the employer did not inform the employee that she had the choice of continuing  the employment by refusing to sign the severance agreement. This was a violation of the employer’s general duty of care and loyalty towards employees. The employer must to a reasonable extent ensure that the employee does not misunderstand the situation and that the employee has sufficient information about the alternative courses of action and the consequences of signing the severance agreement. This was not fulfilled in the case in question.

Finally, the Court of Appeal emphasized the terms and conditions of the termination agreement. In addition to what the employee was entitled to by law in the event of a regular dismissal, the employee had only received a flight ticket to the USA (where she came from) and coverage of the cost of a visa. The Court of Appeal pointed out that the employee consequently had very little to gain by voluntarily signing the severance agreement.

The ruling is still not legally binding, but it nevertheless clarifies the importance of the circumstances related to the negotiations and conclusion of severance agreements. It is important to give the employee sufficient time to reflect, including the opportunity to contact others to consult. Although there is no statutory requirement for providing employees a written notice of such meetings where severance agreements are to be discussed, this may be appropriate. Such notice will also serve as documentation that the employee has been informed about the content of the meeting and given an opportunity to bring an adviser. Depending on the circumstances, it may be wise to hold more than one meeting before a severance agreement is entered into. In our experience, the employee needs time in order to process the idea of ​​terminating the employment. Swift decisions are rarely a good idea in this regard.

Furthermore, employers should be focused on the information provided when offering and negotiating severance agreement. It is vital that the employee makes an informed and voluntary choice. In this connection, we note that it is increasingly common for employees to make audio recordings of such meetings, without necessarily informing anyone in advance.