This month's employment law briefing focuses on the process of terminating an employment contract by way of an agreement between an employer and an employee. This form of termination is commonly known as a "compromise agreement" or "separation agreement".
A compromise agreement entered into between an employer and an employee sets out the terms for termination of an employment contract.
In practice, an employer may consider entering into a compromise agreement either:
- where there is insufficient proof to justify the termination of an employment contract on the grounds of conduct, capacity or incompatibility; and/or
- an employer is unwilling to go through the usual procedure for terminating an employment contract (which can be lengthy, costly and difficult)
This briefing note covers the following:
- the legal basis of a compromise agreement;
- the risks and limitations of compromise agreements; and
- the actions that can be taken by an employer to mitigate the risks associated with compromise agreements.
The legal basis of compromise agreements
The Employment and Labour Relations (Code of Good Practice) Rules, 2007 (the Code of Good Practice) governs the termination of an employment contract by way of an agreement between the employer and employee.
Rule 3(2) of the Code of Good Practice provides for termination of employment by agreement as one form of lawful termination of an employment contract under the common law. Additionally, Rule 4(1) of the Code of Good Practice provides that an employer and employee may agree to terminate the contract in accordance with an agreement.
Further, section 37(2) of the Employment and Labour Relations Act, 2004 (the ELRA) provides that the termination of employment by an employer is deemed unfair if the employer fails to prove:
- that the reason for the termination is valid;
- that the reason is a fair reason:
- related to the employee’s conduct, capacity or compatibility; or
- based on the operational requirements of the employer, and
- that the employment was terminated in accordance with a fair procedure.
As the ELRA requires the termination of an employment contract to be based on fair and valid reasons and in accordance with fair procedures, an employer must pay close attention to these two limbs when considering a compromise agreement to terminate an employment contract.
The risks and limitations of compromise agreements
When considering risks and limitations, it is important to highlight section 28 of the Law of Contract Act, 2002 (the LCA) which provides that:
“Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent”.
In practice, compromise agreements include a provision that restricts an employee from bringing a claim against the employer. However, a provision of this nature is restricted in Tanzania as section 28 of the LCA renders void any provision that seeks to restrain a party from pursuing their claim in court. Accordingly, there is always a residual risk of an employee bringing a claim against the employer notwithstanding the compromise agreement. The employee may invoke section 28 of the LCA.
The overall risk is intensified by the general approach the Commission for Mediation and Arbitration (CMA) has previously taken in relation to compromise agreements. In determining the claims for unfair termination where the employer and the employee had entered into a compromise agreement, the CMA makes its decision based on the ordinary test of fairness and validity of reasoning and fairness of procedure (please refer to paragraph (a) above). Historically, there have been instances where the CMA has found that the termination of an employment contract was unfair despite the parties entering into a compromise agreement.
The possible actions that can be implemented by an employer to mitigate the risks associated with compromise agreements
Where the employer has opted to enter into a compromise agreement with the employee, the former may follow the steps set out below to mitigate the risks associated with an unfair termination claims. The employer must ensure that the compromise agreement includes a clause that makes payment to the employee conditional on:
- the employee filing a claim for unfair termination at the CMA;
- the employer and the employee participating in the mediation of the dispute; and
- the CMA issuing a certificate of settlement of the dispute.
The procedure set out above mitigates the risk of an employee receiving the payment due from the compromise agreement and then opting to file a claim for unfair termination at the CMA. The certificate of settlement of the dispute issued by the CMA deters the employee from filing any further claims for unfair termination since the CMA would have already decided on the matter and issued the certificate of settlement.
However, we would like to flag that there may be a residual risk that the employee will decline to settle the dispute at the mediation stage and elect to proceed to arbitration.
Please do not hesitate to contact us should you have any queries.
Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. Further advice should be taken before relying on the contents of this summary. Clyde & Co Tanzania accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co Tanzania.