Mutual separation vs retrenchment: LAC ruling provides clarity

Image source: rawpixel.com from Freepik

The decision in the appeal, handed down on 26 February 2026, provides welcome clarity and comfort for employers.

Background and findings of the court a quo

After being approached about the possibility of a transfer to the Northern Cape due to the employer’s operational needs, the employee and employer entered into what was termed a ‘mutual separation agreement’. In terms of the agreement, the employee would be retrenched with a severance package, in full and final settlement of all or any claims he may have against the company.

The employee subsequently referred an unfair dismissal dispute to the Bargaining Council for the Civil Engineering Industry (BCCEI), arguing that he had been misled into signing the agreement and that it was signed under misrepresentation and duress.

The arbitrator found that the document signed by the parties was ‘more of a retrenchment letter’ outlining the retrenchment package to be received by the employee and that, because no retrenchment process had been followed, the employee’s dismissal was unfair. The employer was ordered to reinstatement the employee, with backpay.

Remuneration & Payroll

A guide to golden handshakes: Legal tips for untarnished employee exits

27 Jun 2025

On review, the Labour Court found that while the parties had signed a mutual separation agreement to end the employment relationship due to operational requirements, there was no evidence before the arbitrator to suggest that the statutory requirements for retrenchment had been complied with.

The court concluded that the employer was not entitled to use the mutual separation agreement to circumvent the statutory consultation process and that, once it had a discussion with the employee concerning its operational requirements, the employer was obliged to follow the procedure in section 189 of the Labour Relations Act, 1995 (LRA) before the employee could be retrenched.

Accordingly, the court held that the arbitrator’s decision, that the dismissal was unfair because no proper procedure was followed, was one that a reasonable decision maker would have reached.

Validity of the mutual separation agreement

On appeal, the LAC held that the issue in this matter concerned the validity of the agreement between the parties. The validity of an agreement is a legal matter, and the test that should accordingly have been applied on review was the correctness test and not the reasonableness test.

As there was no evidence to support the employee’s contention that he had been misled or coerced into signing the agreement, the agreement ought to have been accepted as valid. The Court clarified that the Labour Court’s conclusion that the employer had avoided the section 189 process by concluding the agreement was unfounded.

Labour Law & Unions

The cost of hiding a dismissal under the guise of 'retrenchment'

Chloë Loubser and Grace Crocker  15 Jul 2025

There was nothing preventing the parties from entering into a mutual separation agreement at any time when operational requirements were being discussed.

The existence of a valid mutual separation agreement meant that there was no dismissal. Consequently, the arbitrator had no jurisdiction to entertain the dispute. The appeal was upheld and the matter was dismissed.

Takeaways for employers

This judgment illustrates the benefit of an agreed termination as a lawful means to end the employment relationship. Where properly concluded, the agreement will have the result that there is no dismissal and accordingly, any claim by an employee for unfair dismissal can be defended on the basis of lack of jurisdiction.

Although the LAC confirmed that a mutual separation agreement can be validly concluded at any time when the employer’s operational requirements are being discussed, it is advisable for employers to formally commence the section 189 process before discussing the possibility of a mutually agreed termination. This would mitigate against a claim by an employee, where agreement cannot be reached, that a subsequent consultation process is a fait accompli.

Where the underlying reason for the termination is the employer’s operational requirements, it is further preferable to frame the agreement as a ‘voluntary retrenchment agreement’ (which is a widely accepted form of retrenchment) and to ensure that the terminology in the document reflects this to avoid misunderstanding and misinterpretation by arbitrators down the line, as appears to have been the case in this matter.