If an employer and an employee agree that the employee's contract should terminate, then the contract ends by mutual agreement, not by dismissal. However, this applies only where both parties have genuinely and freely consented to the termination. In practice, a court or employment tribunal is more likely to accept that an employee has genuinely agreed to a mutual termination if he or she has received a favourable financial settlement on departure from the company. For example, where an employee is offered and freely accepts early retirement on a pension, that may amount to a termination by mutual agreement.
Some employers get employees to agree, either by a term in their contract or in a separate agreement, that their employment contracts will terminate automatically or by mutual agreement if the employee acts in a certain way, such as by failing to return from extended leave on the agreed date. This type of agreement is effectively an attempt to get the employee to contract out of his or her right to claim unfair dismissal, and the Employment Rights Act 1996 states that such agreements have no legal effect. Therefore, if an employer acts upon an agreement of this type and treats the individual as no longer employed, the employee has the right to claim unfair dismissal. It is advisable, therefore, for a company to deal with this type of case through its usual disciplinary or other relevant procedure.