A mutual termination agreement is not a dismissal but an agreement by which the parties cancel the employment contract. The practical consequence is this: because there is no dismissal, statutory severance and notice do not arise automatically — and precisely for that reason, the amounts paid under the agreement are what make it valid. An agreement without adequate payment does not protect the employer; it moves the whole dispute into court.
This page covers the reasonable benefit test, how the payments are taxed, the conditions a release must meet, the risk created by the social security exit code, and how the arrangement compares with settlement at mediation.
Employers turn to mutual termination because of job security: where the agreement is valid, no reinstatement claim can be brought. But the courts treat as invalid any agreement used to avoid job security provisions or to disguise a dismissal by the employer.
In the ordinary course of events no employee agrees to give up those rights without receiving a reasonable benefit in return. Where the payment is inadequate the agreement is set aside and the position is treated as a dismissal by the employer. The employer then loses the amount paid and faces the reinstatement claim as well.
The Reasonable Benefit Test
Because the legislation does not regulate mutual termination, the conditions for validity have been developed through case law. What decides the question is whether the employee has been compensated for what the arrangement costs them.
| What the employee gives up | What is expected in return |
|---|---|
| Severance | Payment of the amount calculated on the statutory basis |
| Notice compensation | Payment of the equivalent of the notice period for their service |
| The right to bring a reinstatement claim | An additional payment reflecting that right |
| Unemployment benefit | Taken into account in setting the additional payment |
| Unused annual leave | Payable in any event; the agreement does not remove it |
In settled practice, paying only severance and notice is not treated as a reasonable benefit. The employee would have received those amounts on a dismissal as well; what the agreement additionally costs them is the reinstatement claim and unemployment benefit.
For an employee within the scope of job security, an additional payment above the statutory entitlements is therefore expected. There is no fixed measure for the amount; length of service, salary, the financial position of the business and whether the employee is within job security are weighed together.
How the Payments Are Taxed
The tax treatment of a payment follows its nature rather than the label given to it. This is one of the most frequent payroll errors in this area.
| Payment | Income tax | Social security |
|---|---|---|
| Severance equivalent | Exempt up to the severance ceiling | Not subject to premiums |
| Notice equivalent | Treated as salary, subject to withholding | Not subject to premiums |
| Additional payment, job security compensation, loss of employment payment | Whatever the label, treated as salary; the portion not exceeding the severance ceiling falls within the exemption | Not subject to premiums |
| Unused annual leave | Treated as salary, subject to withholding | Not subject to premiums |
| Salary for the final period worked | Ordinary salary treatment | Subject to premiums |
| The agreement itself | Attracts stamp duty, calculated on the payment items | |
Payments made under a mutual termination agreement under various names — loss of employment payment, end of service payment, job security compensation, additional payment — are treated as salary. The exemption comes not from the label but from the severance ceiling: the portion not exceeding that amount is exempt from income tax, and the excess is subject to withholding.
The most common error in practice is treating the whole of the additional payment as exempt and leaving it off the payslip. On inspection this produces underpaid withholding, late payment interest and penalties. And where the agreement does not state whether the figures are gross or net, the difference falls on the employer.
The Release: Why Employers Are Sued After Paying
General release wording included in the agreement often does not give the employer the protection it assumes. The Code of Obligations subjects a release to strict conditions, and a release that does not meet them is void.
- The release must be in writing
- At least one month must have passed since the employment contract ended
- The type and amount of the claim released must be stated expressly
- Payment must have been made in full and through a bank
- A release that does not meet these conditions is absolutely void
- A document covering a partial payment is a receipt, not a release
- The same applies where the true amount of the entitlement cannot be determined from the document
- Wording in the agreement to the effect that all entitlements have been received is not by itself a release
That the release is executed at least one month after the contract ends is a condition of validity. A release signed on the termination date does not meet it and is void.
The practical consequence: the employer makes the payment, obtains the signature and believes the matter is closed; the employee later brings a claim and the release is set aside. The correct sequence is to execute the termination agreement on the termination date and the release, as a separate document, a month later.
The Exit Code and Unemployment Benefit
Declared correctly
- Exit code
- 22 — other reasons
- Unemployment benefit
- Not available
- Reinstatement
- Cannot be claimed where the agreement is valid
- Employer’s position
- Can rely on the agreement
Declared under code 04
- What is declared
- Dismissal by the employer without valid reason
- Unemployment benefit
- The employee receives it
- Reinstatement
- A dismissal has been declared
- Employer’s position
- Cannot rely on the agreement; recovery risk
Where a mutual termination has been agreed, it is common practice to declare the exit as a dismissal by the employer without valid reason so that the employee can claim unemployment benefit. Employers usually do this as a favour.
The consequence is serious. The employer has declared on the official record that it dismissed the employee. In a reinstatement claim the mutual termination defence contradicts that declaration and falls away. There is also a risk that the employment agency will seek recovery of the benefit wrongly paid. Where the aim is for the employee to receive unemployment benefit, the route is not a mutual termination but a dismissal for valid reason.
Mutual Termination or Mediation?
Because mediation is a condition of bringing most employment claims, a mutual termination agreement is not the only way for the parties to settle. The two routes produce different outcomes.
| Item | Mutual termination | Mediation |
|---|---|---|
| Timing | Before or at the point of termination | After termination, before proceedings |
| Nature of the document | An agreement between the parties | Enforceable in the same way as a judgment |
| Later claims | Can be brought on the ground that the agreement is invalid | Cannot be brought on the matters settled |
| Validity review | Reviewed against the reasonable benefit test | The parties’ intention is recorded in the minutes |
| Unemployment benefit | Not available | Depends on how the termination was made |
| Need for a release | Separate document, one month later | The minutes serve that function |
For an employer, mediation usually produces a firmer closure: the settlement minutes are enforceable as a judgment and the matters settled cannot be litigated again, whereas a mutual termination agreement can be set aside later. Against that, mediation comes into play after termination and so does not remove the risk attaching to the termination itself.
The Process
- Weigh the alternatives firstCompare mutual termination, dismissal for valid reason and settlement at mediation. For an employee outside the scope of job security, the protection a mutual termination provides is limited.
- Calculate the packageSeverance, notice, unused leave and the additional payment are calculated separately. Whether the additional payment meets the reasonable benefit test is assessed at this stage.
- Separate the tax treatment item by itemIdentify which items fall within the exemption and which are subject to withholding. State expressly in the agreement whether the figures are gross or net.
- Prepare the agreementTermination date, payment items and amounts, payment date and method, company property to be returned and confidentiality obligations. Inform the employee in writing of the consequences for job security and unemployment benefit.
- Pay through the bankEach item separately and with a description. A single lump sum makes it difficult to prove which entitlement the payment was made against.
- Declare the exit under the correct codeA mutual termination is declared as such. Where the aim is for the employee to receive unemployment benefit, the route is a dismissal for valid reason.
- Execute the release a month laterStating the type and amount of the claim expressly, with payment made in full through a bank. A release signed on the termination date is void.
Common Mistakes
- Paying only the statutory entitlements. The employee would have received those on a dismissal; for an employee within job security an additional payment is expected.
- Signing the release on the termination date. At least one month must have passed; otherwise it is void.
- Relying on general release wording in the agreement. Without the type and amount stated expressly, no release takes effect.
- Declaring the exit under code 04. A dismissal has been declared; the mutual termination defence falls away and recovery risk arises.
- Treating the whole additional payment as exempt. The exemption is limited to the severance ceiling; the excess is subject to withholding.
- Not stating whether figures are gross or net. The difference falls on the employer and produces a dispute.
- Paying everything as one lump sum. It cannot be shown which entitlement the payment discharged.
- Never considering mediation. Settlement minutes are enforceable as a judgment and prevent the matters settled being litigated again.
Frequently Asked Questions
What is the difference between mutual termination and dismissal?
Is severance paid on a mutual termination?
Are mutual termination payments taxable?
Can an employee claim unemployment benefit after a mutual termination?
What is wrong with declaring the exit under code 04?
When should the release be executed?
Can a mutual termination agreement be oral?
Should mediation be preferred to a mutual termination?
As the Ozbek CPA team, we handle the financial and payroll side of mutual termination in Turkey — calculating the package and assessing it against the reasonable benefit test, separating the items for tax and premium purposes, reflecting gross and net figures correctly in the agreement, declaring the exit under the correct code, and executing the release within time. The legal drafting of the agreement is prepared together with counsel. See also our pages on employment contracts, payroll services, salary taxation and Turkish labour law. Contact us.
