SETTLEMENT & MUTUAL SEPARATION AGREEMENTS

Written by Melissa Eales

In the hairdressing, cosmetology, beauty, and skincare industry, where working relationships are often close-knit and salon environments are small, the manner in which employment ends can significantly affect staff morale, client loyalty, and the establishment's reputation. Whether an employer and employee have reached an impasse, or a dispute has arisen following a dismissal, having the right agreement in place, correctly drafted and freely entered into, can make the difference between a clean exit and costly litigation.

Employment relationships do not always end by resignation, dismissal, retrenchment or retirement. Employers and employees frequently resolve workplace issues by agreement. Two commonly used mechanisms are mutual termination agreements and settlement agreements. Although they are sometimes confused, they serve different purposes and arise in different circumstances. Understanding the distinction helps employers and employees comply with the Labour Relations Act (LRA) and reduce the risk of future disputes.

What is a mutual termination agreement?

A mutual termination agreement is a written contract in which the employer and employee voluntarily agree to end the employment relationship on mutually acceptable terms. Unlike a dismissal, which is unilateral, a mutual termination rests on the consent of both parties: the employee agrees to leave, and the employer agrees to specified exit terms.

Key Principles

• Voluntary: both parties must genuinely consent.

• No coercion: signing under pressure may render the agreement challengeable.

• Agreed exit date: the employment relationship ends on a specified date.

• Recorded financial terms: may include notice pay, pay in lieu of notice, accrued leave pay, severance-type or ex gratia payments.

• Settlement wording: often records that neither party has further claims arising from the employment relationship.

When to use it?

Typical circumstances where a mutual termination agreement is appropriate include:

• Irretrievable breakdown in the working relationship.

• Persistent workplace conflict where continued employment is impractical.

• Disciplinary circumstances where the parties prefer to avoid formal disciplinary processes.

• Situations where an employee wishes to leave but requires negotiated payments, reference letters or other agreed terms.

Example: Senior Stylist Exit by Mutual Agreement

A senior stylist at a busy hair salon has worked for the owner for six years. Over the past year, the relationship has deteriorated due to ongoing conflict over commission structures and client allocation. Neither party wishes to go through a formal disciplinary or retrenchment process. The owner and stylist agree in writing that employment will end on a specified date.

The agreement records that the stylist will receive their outstanding leave pay, a negotiated ex gratia payment equivalent to X weeks' salary, and a written reference confirming their years of service and areas of expertise. A confidentiality clause is included. Both parties sign voluntarily, and the stylist is given two days to consider the offer and consult with a representative of their choice before signing.

Practical and legal considerations

• Check recent labour court rulings

• Voluntariness: the agreement must be entered into freely. If an employee proves coercion, the arrangement may be set aside, and the employee could claim unfair dismissal.

• Opportunity for advice: employers should allow reasonable time for the employee to consider the offer and obtain independent advice where appropriate.

• Clear drafting: include terms about pay, benefits, reference letters, confidentiality and release of claims to reduce later disputes.

What is a settlement agreement?

A settlement agreement is a written contract that resolves an existing or potential labour dispute between employer and employee. Its primary purpose is to bring the dispute to finality and prevent further litigation or arbitration.

Key Principle

• Purpose: expressly to settle a dispute or potential claim.

• Terms: records the agreed settlement, which may include compensation, reinstatement, withdrawal of claims, confidentiality, and reference provisions.

• Finality clause: commonly contains wording that the matter is settled “in full and final settlement.”

• Court/order possibility: may be made an order of the Labour Court in terms of section 158(1)(c) of the LRA where appropriate.

When to use it?

Settlement agreements are used to resolve disputes including but not limited to:

• Unfair dismissal claims.

• Unfair labour practice disputes.

• Retrenchment-related disputes.

• Wage and benefit disputes.

• Discrimination claims.

• Contract breach claims.

Example: Settlement Following an Unfair Dismissal Referral

A beauty therapist employed at a nail and skincare studio is dismissed following a disciplinary hearing for allegedly misappropriating retail stock. They dispute the finding and refer an unfair dismissal dispute to the CCMA/Bargaining Council. During conciliation, both parties agree that the employment relationship cannot be restored. The employer offers two months' remuneration in full and final settlement, together with a neutral reference confirming dates of employment and job title. The therapist accepts, withdraws their claim, and both parties sign a written settlement agreement recording the terms, the withdrawal, a confidentiality clause, and a mutual non-interference undertaking. The agreement is drafted to meet the requirements of section 158(1A) of the LRA so that either party may approach the Labour Court to make it an order of court.

Settlement agreements and the Labour Court

Section 158(1)(c) of the LRA allows the Labour Court to make arbitration awards or settlement agreements an order of court. Not every settlement agreement automatically becomes an order, but the courts have recognised that settlement agreements play an important role in achieving the LRA’s objectives of speedy and cost-effective dispute resolution.

In Greef v Consol Glass (Pty) Ltd, the Labour Appeal Court considered whether settlement agreements concluded before a dispute was formally referred to the CCMA or Labour Court could be made orders of court. The case involved a voluntary retrenchment agreement and a later dispute about whether the employee had resigned during the notice period. The Labour Appeal Court rejected a narrow interpretation that limited court orders to settlements concluded after referral. It confirmed that, read together with section 158(1A), a settlement agreement will qualify for enforcement as an order of court if it:

• Is in writing.

• Settles a dispute.

• Concerns a dispute that a party has the right to refer to arbitration or to the Labour Court.

• Does not fall within the categories expressly excluded by the LRA.

The judgment promotes early settlement, consistent with the LRA’s objectives of speed, cost-effectiveness and workplace stability.

Summary difference

• Purpose: Mutual termination ends the employment relationship by agreement; settlement agreements resolve a dispute.

• Existence of dispute: Mutual terminations may occur without any dispute; settlement agreements require an existing or potential dispute.

• Forum linkage: Mutual termination need not be linked to Bargaining Council / CCMA / Labour Court proceedings; settlement agreements may be negotiated before, during or after Bargaining Council / CCMA / Labour Court processes and can be made into court orders where statutory requirements are met.

• Typical content: Mutual terminations focus on exit terms and payments; settlement agreements record withdrawal or settlement of claims and other remedies.

Examples

• Mutual termination: Employer and employee agree the relationship has irretrievably broken down; employment ends on an agreed date with notice pay and accumulated leave paid out.

• Settlement during conciliation: Employee refers an unfair dismissal dispute to the CCMA; during conciliation the employer offers three months’ salary in exchange for withdrawal of the claim and confidentiality, which the employee accepts.

• Settlement before referral: Parties settle an alleged unfair dismissal before referral to the CCMA; following Greef, that written agreement may be made an order of court if it meets section 158(1A) requirements.

Both mutual termination and settlement agreements are valuable tools for resolving employment matters efficiently and amicably. A mutual termination agreement is primarily used to end employment by mutual consent, while a settlement agreement resolves a dispute and provides finality. Careful drafting, clear voluntariness, and awareness of the LRA (and relevant case law such as Greef v Consol Glass) will help ensure enforceability and reduce later litigation risk.