Is it Permissible to Conclude a Settlement Agreement that Reflects the Incorrect Reason for Terminating an Employment Relationship?

This is the question that the High Court had to answer in Lawrie v Nursing Response CC 2016 JDR 0896 (ECG).  In Lawrie, the employer dismissed an employee for misconduct.  The employee subsequently referred a dispute to the employment tribunal challenging the fairness of her dismissal. At the employment tribunal, the parties concluded a settlement agreement on the bases that: (a) the employer pays the employee R20 000.00, and (b) the employment relationship between the parties terminated as a result of the expiry of the employee’s fixed term contract of employment (rather than the misconduct).

Notwithstanding the settlement of the dispute, the employee launched proceedings in the High Court, averring that the settlement agreement was invalid on the grounds that it was against public policy.

The court dismissed the matter in that it was of the view that the Labour Court had exclusive jurisdiction to adjudicate it. The employee then took the matter on appeal to a full bench in the High Court.  On appeal, the court disagreed with the court a quo that it did not have jurisdiction to adjudicate the matter.  For purposes of this article, it is not necessary to discuss the court’s reasoning in that regard. 

As to the employee’s contention that the agreement was against public policy, the employee argued that the parties changed the factual situation in a dishonest way and that she will commit a fraud if she presents the settlement agreement to prospective employers.

The appeal court disagreed. To render an agreement against public policy, it considered principles which include the following (footnotes omitted):

“The issue to be addressed… is whether it can be said that those clauses are clearly inimical to the interests of the community, contrary to the law or morality or run counter to social or economic expedience and, accordingly, unenforceable… It should not be concluded that a contract is contrary to public policy merely because some of its terms offend one's individual sense of propriety and fairness… Although public policy generally favours the utmost freedom of contract, it nevertheless takes into account the necessity of doing simple justice between person and person… The court's power to declare contracts invalid which are against public policy is a power to be exercised sparingly and only in the clearest of cases”.

The court held that the clauses of the settlement agreement offended only the employee’s sense of propriety and fairness.  The court held that prospective employers too, would not be offended because the agreement speaks for itself. If necessary, the employee can explain to prospective employers the factual position that led to her dismissal, she challenged her dismissal and her employer “conceded the possibility that her dismissal might have been unfair and therefore agreed that her services were” terminated upon the expiry of a fixed term contract of employment.  The court accordingly seems to suggest that it would be above board for an employee to at the first instance, represent to prospective employers that the employee was not dismissed, in circumstances where factually, the employee was, and where a settlement agreement provides otherwise. As an aside, this begs the question whether the employee could be dismissed for dishonesty if a prospective employer hires the employee where the employee was dismissed but represents otherwise (for instance that the employment ended due to the expiry of a fixed term employment contract). We suggest that it is arguable that in such a situation, dismissal may not be an appropriate sanction, given that a strong mitigating factor would be that the employee acted within the confines of the Lawrie decision in making the misrepresentation.

It is important to note however, that the Lawrie decision does not offer free reign to parties to agree as they deem fit on what the reason for the termination of employment may be in similar circumstances. A case on point is the decision of Swanepoel v KPMG Services (Pty) Ltd (2022) 43 ILJ 656 (LC). In Swanepoel, the employer had issues with the employee’s performance. It gave the employee an option to resign or be subjected to a disciplinary process.  Nonetheless, the parties opted to conclude a settlement agreement, regulating the termination of the employee’s employment. In the form used for purposes of claiming from the unemployment insurance fund, the employer indicated the reason for termination of employment as “involuntary resignation”.

After an official of the Department of Labour informed the employee that the reason stated in the form did not qualify him to be paid an unemployment insurance benefit, the employee approached the Labour Court to compel the employer to amend the reason on the form as “retrenchment” as the termination of his employment (which would have qualified the employee for such a claim).  In interpreting the settlement agreement to determine the reason for the termination of employment, the court found that the employment relationship terminated on a “mutual basis” (or by mutual agreement between the parties).

The court stated that to indicate the reason for the termination of employment as “retrenchment” would constitute a contravention of the Unemployment Insurance Act (UIA). In terms of the UIA, it is a criminal offence if a person, amongst others:

• Knowingly makes a statement to be materially false or which results in an incorrect payment of benefits under the UIA; or
• Wilfully makes a false entry on any record or document relating to the contributor’s employment history or to a contributor’s claim for benefits.

The court accordingly held that the relief that the employee sought was incompetent and ill-conceived in that the employee’s employment terminated by mutual agreement between the parties (and not because she was retrenched as she claimed).

Comment

There is no doubt that the Lawrie decision offers greater flexibility and comfort to parties to settle employment disputes.  However, whilst parties have the rubber stamp to alter the reason for terminating an employment relationship, to avoid potentially falling foul of applicable legislation (such as the UIA), it is advisable to seek specialist legal assistance when formulating such agreements.

"Please note that the above article has been authored for information purposes only and does not constitute legal advice. The reader is therefore advised to consult with an attorney where necessary."