According to the principle of freedom of contract, parties may draw up and subsequently terminate a contract. The contract drawn up to terminate the first contract by mutual understanding is called a cessation contract.

In order to terminate an employment contract, one party to the employment contract may propose to the other party the constitution of a cessation contract. A cessation contract executed between an employee and his or her employer is not a unilateral contract and does not constitute the employee's offered resignation. In other words, the termination of an employment contract through a cessation contract cannot be deemed as a one-party termination.

Employers began to execute cessation contracts after the enactment of the Labour Law (4857) in 2003, which regulated job security provisions and protected employees from invalid unilateral terminations effected by their employers. There is no regulation regarding the form or procedure for the execution of a cessation contract under the law; however, the Court of Appeals accepts cessation contracts as valid if employers fulfil certain requirements.

Although employees execute cessation contracts of their own free will, in practice, they often subsequently file reinstatement to work lawsuits in order to be entitled to job security compensation. In such cases the Court of Appeals must determine the validity of the cessation contract and does so by considering the following factors:

  • whether the employee gave his or her consent;
  • whether the employee acted of his or her own free will; and
  • whether the employee had been given reasonable compensation.

First, it should be clearly determined that the employee agreed to the termination of the employment contract by mutual understanding. In cases where an employee has signed a cessation contract with an annotation stating that he or she reserves the right to make future claims, it can be concluded that the employee has not given his or her unconditional consent and thus such cessation contract shall be deemed invalid.

Second, the employee must have signed the cessation contract of his or her own free will. In cases where it has been signed under duress or by mistake and this has been proven by the employee, the contract shall be deemed null and void. Furthermore, since the employer has carried out an invalid termination, the employee shall be successful in his or her reinstatement to work claim. In practice, employees usually claim that:

  • they signed the cessation contract under pressure from the employer;
  • they had no intention of terminating the employment contract; or
  • the employer had threatened them by saying that they would not receive their due employment benefits.

Therefore, it is advisable for the employer to:

  • state explicitly each amount that will be paid to the employee under the cessation contract;
  • explain the amounts of which the employee will be deprived - in particular, unemployment insurance payments;
  • provide the employee with a reasonable timeframe within which to review the cessation contract; and
  • if the employee so requests, allow him or her to discuss the terms of the contract with his or her lawyer.

Third, the employee must be offered reasonable compensation. This is satisfied by offering payment in a redundancy package. Since the employee would already be entitled to standard compensation (eg, severance payments, notice payments or other unpaid benefits such as annual pay), the employer must provide the employee with additional compensation; otherwise, there will be no reason for the employee to execute the cessation contract and the cessation contract shall be deemed invalid.

The size of the redundancy package to be offered will be evaluated with regard to whether it is favourable to the employee. This issue is considered on a case-by-case basis and if such amount favourably benefits the employee, the cessation contract shall be deemed valid. However, 'reasonable compensation' cannot be defined and is subjective. Paying the employee only certain compensatory amounts is not sufficient for the cessation contract to be deemed valid. Thus, the compensation offered to the employee is significant in the determination of the cessation contract's validity. Nonetheless, if the employee was made to sign the cessation contract under pressure from the employer, the contract shall still be deemed invalid.

The size of the redundancy package may be determined considering the following factors:

  • the reason for executing the cessation contract;
  • the employee's seniority;
  • the company's financial position;
  • the general practice of the workplace; and
  • the amount of job security compensation offered, which, pursuant to the Labour Law, varies from between four and eight months' wages.

Most often, a job security compensation payment of four months' wages is deemed as reasonable compensation in addition to the employee's other benefit entitlements. Thus, a redundancy package consisting of more than the minimum job security compensation limit and sufficient severance and notice payments will be accepted as reasonable compensation.

Under the Income Tax Law, notice payments are subject to income tax, but severance payments are not. However, in case of the execution of a cessation contract, any amount paid as a severance payment does not constitute a severance payment under the Labour Law and thus shall be subject to income tax in addition to stamp tax. Such deductions make a significant difference when compared to severance payments that are paid in unilateral termination cases. The employee must be informed about such tax issues and made aware that he or she will be paid less in comparison to a legal severance payment. If the employer does not inform the employee, the cessation contract may be deemed invalid.

For further information on this topic please contact Melek Onaran Yüksel or Ahu Pamukkale Günbay at YükselKarkınKüçük by telephone (+90 212 318 05 05), fax (+90 212 318 05 06) or email ([email protected] or [email protected]).