Mutual Termination Agreements: Clauses and Pay NZ

Ending an employment relationship is rarely the “fun” part of running a business. Even when the role isn’t working out, you’ve still got a person on the other side of the table, and you’ve also got legal obligations to manage.

That’s where a mutual termination agreement can sometimes be a practical, lower-risk way forward.

In simple terms, a mutual termination agreement is a written agreement where you and your employee agree to bring the employment relationship to an end, usually on agreed terms (like a final date, notice arrangements, final pay, and what each party can and can’t say or do afterwards).

Used properly, it can reduce uncertainty, protect your business, and help both sides move on with clarity. Used poorly (or rushed), it can create new risk – including allegations that the employee was pressured into resigning.

Below, we’ll walk you through what a mutual termination agreement is in New Zealand, when it’s commonly used, what to include, and what to watch out for as an employer.

What Is A Mutual Termination Agreement?

A mutual termination agreement (sometimes called a mutual separation agreement or termination by consent) is a contract that records an agreed end to employment.

Rather than you unilaterally terminating the employee (which usually requires a fair process and a substantive reason) or the employee resigning on their own initiative, both parties agree that:

the employment will end on a stated date, and
the end-of-employment terms are settled (for example, what’s paid out, return of property, and confidentiality obligations).

For small businesses, the big appeal is that it can be a more controlled way to manage exit risk. But it’s important to understand the legal context in NZ: employment relationships are governed by good faith obligations, and employees have rights to raise personal grievances if they believe they were treated unfairly.

That means a mutual termination agreement should never be treated as a “quick fix” or a way to skip a fair process. It needs to be approached carefully and respectfully.

When Should Your Business Consider A Mutual Termination Agreement?

There’s no single “right” time to use a mutual termination agreement, but there are some common situations where it can be genuinely helpful.

1. When The Role Isn’t Working Out (But You Want A Clean, Agreed Exit)

Sometimes performance or conduct issues are emerging, but both sides can see that the role isn’t the right fit. You might want to avoid a drawn-out performance management process, and the employee may prefer to move on quickly.

In those situations, a mutual termination agreement can give both parties certainty about:

the last day of work
what notice (if any) is worked or paid out
how final pay is calculated
what’s communicated internally and externally

Just be cautious: if there is a performance issue, offering a mutual termination agreement must be handled in a way that doesn’t look like pressure, coercion, or a “resign or be fired” ultimatum.

2. When A Restructure Or Redundancy Is Being Discussed

Restructures can be stressful and time-consuming, especially for small teams. In some cases, an employee may prefer to negotiate an agreed departure rather than go through a full redundancy consultation process.

However, redundancy still has legal requirements, and you should not use a mutual termination agreement as a shortcut to avoid consultation obligations. If you’re in this territory, it’s worth getting advice early so you don’t accidentally create a personal grievance risk by mishandling the process.

3. When There’s A Relationship Breakdown

Not every issue is about performance. Sometimes it’s a communication breakdown, clash of working styles, or loss of trust. If the working relationship has become difficult, a mutual termination agreement can help you close out the employment relationship with agreed ground rules (including confidentiality and non-disparagement).

4. When You Want To Resolve Potential Disputes

In some situations, there’s already conflict – for example, the employee has raised concerns, you’ve received a complaint, or both sides think a dispute is brewing. A mutual termination agreement can form part of a broader settlement approach.

If you’re trying to settle a dispute, it’s particularly important to structure the agreement properly and ensure the employee has the opportunity to take independent advice.

Key Legal Points NZ Employers Need To Understand

Even though a mutual termination agreement is “mutual”, it sits in the employment law context, which has some unique features compared to standard commercial contracts.

Good Faith Obligations Still Apply

In NZ, employment relationships involve mutual obligations of good faith. Practically, for you as an employer, that means you should approach a mutual termination discussion transparently and fairly, and avoid misleading statements or tactics that could later be criticised.

“Mutual” Must Be Genuine (Pressure Creates Risk)

A mutual termination agreement should be a real choice, not something the employee felt forced into. If the employee later claims they had no reasonable option but to agree, they may argue they were:

constructively dismissed (for example, pressured to resign), or
unfairly treated in the lead-up to the termination.

This is one of the biggest practical risks for businesses. Even if the document is signed, the circumstances around signing matter.

Independent Advice Is A Smart Risk-Management Step

While not every situation legally requires it, it’s very common (and usually wise) to:

encourage the employee to seek independent legal advice, and
give them time to consider the offer (rather than demanding an immediate answer).

This helps show that the agreement was entered into freely and with informed consent.

Final Pay Must Still Be Correct

A mutual termination agreement doesn’t override your obligations to pay the employee correctly. You still need to ensure final pay includes things like:

any outstanding wages up to the last day worked
any annual leave entitlements payable on termination
any other contractual entitlements (where applicable)

If you’re unsure what applies, it’s worth reviewing the employee’s Employment Contract before making an offer.

What Should A Mutual Termination Agreement Include?

There’s no one-size-fits-all document, but a strong mutual termination agreement usually covers the practical points that cause disputes later.

Below is a checklist of clauses and issues we commonly see businesses include.

1. Termination Date And Notice Arrangements

You’ll want to clearly specify:

the employee’s last day of employment
whether they will work out their notice period or not
if not working notice, whether notice is paid out (and how it’s calculated)

If you’re paying out notice rather than having it worked, it’s important to document it properly (and ensure it aligns with the contract and minimum legal requirements). Depending on your circumstances, the concept of payment in lieu of notice may be relevant.

2. Final Pay And Any Additional Payments

This section should set out what the employee will receive, such as:

final salary/wages to the termination date
annual leave payout and how it’s calculated
any agreed additional amount (often called an ex gratia payment)
superannuation/kiwisaver deductions (where applicable)
timing of payment (for example, on next payroll date)

Be clear about whether the additional amount is conditional on signing the agreement and meeting ongoing obligations (like confidentiality).

3. Return Of Company Property And Access

If the employee has company property, you should include a practical return list and deadline, such as:

laptop, phone, keys, tools, uniform
access cards and alarm codes
client lists, documents, and any business records

You may also want to cover IT matters like revoking system access, returning passwords, and confirming documents aren’t retained on personal devices.

4. Confidentiality And Public Statements

Most businesses want to protect sensitive information during and after exit, including:

pricing and financial information
client details
internal processes
trade secrets

Your employment agreement may already cover confidentiality, but a mutual termination agreement often repeats or strengthens the obligation, and may also cover what each party can say publicly or internally about the departure.

If you already use contracts with a Confidentiality Clause, it’s worth checking how that interacts with the termination document.

5. Restraints (If Applicable)

Some businesses want to re-confirm post-employment restraints like non-solicitation or non-compete obligations. Restraints can be tricky in NZ (they need to be reasonable and tailored), so this is an area where getting advice is worthwhile.

If you’re considering restraints, you might also be thinking about a separate Non-compete agreement or restraint advice.

6. Settlement / Release Of Claims

Many mutual termination agreements aim to close the matter out by recording that the parties:

agree the employment ends by mutual consent, and
intend to settle certain issues between them on an agreed basis (noting that some employee rights and claims can’t necessarily be signed away, and a “full and final” settlement may need to be documented in a specific way under NZ employment law - for example, as a Record of Settlement under the Employment Relations Act 2000).

This part needs to be drafted carefully. A poorly drafted release clause can create confusion, or give you a false sense of security.

7. Practical Details: References, Announcements, And Handover

For small businesses, the “people” side of exits matters. You may want to include:

who will be the contact for reference checks, and what will be said
an agreed internal announcement (especially important for tight-knit teams)
handover expectations (projects, client relationships, documentation)

These aren’t always strictly “legal” clauses, but they often prevent misunderstandings and protect business continuity.

Common Mistakes Businesses Make (And How To Avoid Them)

A mutual termination agreement can be a great tool, but only if it’s handled properly. Here are some common pitfalls we see businesses fall into.

Mistake 1: Treating It Like A Shortcut To Avoid A Fair Process

If you’re effectively terminating someone due to performance or misconduct, you generally still need to follow a fair and reasonable process. A mutual termination agreement should not be used to cover up an unfair dismissal.

Even where the employee signs, they may later claim they signed under pressure or without a real choice, which can create the very dispute you were trying to avoid.

Mistake 2: Giving The Employee No Time (Or No Real Chance) To Consider

If you present a document and ask for a signature “today”, you increase the risk it will be challenged later.

Instead, consider:

giving them a reasonable timeframe to consider the offer
encouraging them to get advice
keeping your communications calm and factual

Mistake 3: Getting Final Pay Wrong

Final pay issues can quickly escalate into disputes. Before you put numbers in writing, check:

the employment agreement terms
any commission/bonus arrangements
annual leave balances and pay rates

If you need to vary contractual obligations (for example, changing the notice period outcome), document it clearly. This is essentially a type of contract variation, and you want the paperwork to be tight. In some cases, a Deed of Variation structure may be useful depending on what’s being changed and how formal you want to be.

Mistake 4: Forgetting About Privacy And Confidential Information

Employee exits often involve sensitive information: HR files, complaints, customer data, and internal communications.

Make sure you’re careful about:

what you disclose to other staff
how you store termination documents
limiting access to “need to know” people only

NZ businesses also need to take privacy obligations seriously when handling personal information. If your business already has a Privacy Policy, it can help set expectations about how personal information is collected, used and stored (though your internal HR handling should still be managed carefully).

Mistake 5: Using A Generic Template

It’s tempting to grab a template online and edit it. The problem is that termination agreements often need to reflect:

your employment agreement terms
your payroll and leave position
any existing disputes or risk factors
your operational needs (handover, clients, IP, equipment)

Getting the document tailored can save you time, stress, and cost later.

Key Takeaways

A mutual termination agreement is a written agreement where you and your employee agree to end the employment relationship on clear, negotiated terms.
Mutual termination can be useful for small businesses when a role isn’t working out, there’s a relationship breakdown, or both sides want a cleaner, more certain exit.
To reduce risk, the “mutual” part must be genuine – avoid pressure, provide reasonable time to consider, and encourage independent advice.
A well-drafted agreement should cover the termination date, notice arrangements, final pay, return of property, confidentiality, and practical handover details.
You still need to ensure final pay and minimum employment obligations are met, even if the end is by agreement.
A standard mutual termination agreement won’t always operate as a binding “full and final” settlement of all employment claims - for example, resolving personal grievance risk may require a properly structured settlement process (often a Record of Settlement under the Employment Relations Act 2000).
Using a one-size-fits-all template can backfire, especially where there are performance issues, disputes, restraints, or sensitive information involved.

This article is general information only and isn’t legal advice. Because employment terminations can carry significant risk, it’s best to get advice on your specific situation before making (or accepting) any settlement offer.

If you’d like help drafting or reviewing a mutual termination agreement (or you’re not sure whether it’s the right approach for your situation), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.

Mutual Termination Agreements in NZ: Clauses, Pay and Process