What Is a Separation Agreement?
In the context of employment and workplace relationships, a separation agreement or severance agreement is an important, legally binding contract. This simple document, which generally occurs at the end of the employment relationship, usually has a standard form or set of components that both parties will negotiate as needed before reaching a mutually acceptable agreement.
The idea behind a separation agreement is that the employee typically agrees to give up certain rights in exchange for a severance package from the employer . Although workers may voluntarily exit the company, there often are situations in which a separation agreement is required in order to end the employment relationship amicably.
For the employer, offering a severance package can be a good way to avoid future litigation, because it gives an incentive for an employee to leave with good favor. For the employee, a severance agreement means that an employer may provide him or her with a lump sum payment, an extended benefit package, an employee stock option plan, an early retirement option or some other type of consideration in exchange for the employee’s rights under the law.
Essential Elements of a Separation Agreement
Most often, an employment or separation agreement is a compliant written release in exchange for a monetary payment or other benefit. Employers and employees will typically agree to: (a) a mutual waiver and release of claims; (b) the payment of compensation; (c) a non-disparagement clause; and (d) confidentiality clauses. The agreement may also cover return of company property, no future employment, cooperation on pending litigation or non-competition clauses that affect future employment. Of course, the employer’s bargaining power and the employee’s particular employment circumstances can affect the terms of a particular separation agreement. Employers with access to skilled employees in a competitive market can modify these standard terms and conditions.
Legal Considerations for the Employee
If an employee is offered an agreement which waives rights, such as a release of legal claims, he or she should have the opportunity to read and understand it before signing. An employee has the right to have a lawyer review such an agreement, although no law requires this. In fact, the employee may be provided with time to do so. As a practical matter, an employee should be wise to have a labor (or employment) lawyer read it to determine the effect of signing it.
One of the more important issues for the employee is whether the agreement contains a release or a waiver. On the most basic level, these are simply legal terms which refer to the employee relinquishing their right to bring a legal claim against the employer. Such an agreement may exclude his or her right to sue the employer under the Age Discrimination in Employment Act (ADEA), for example, which protects older workers, or the Americans with Disabilities Act (ADA), which protects employees with disabilities. Often, employees are willing to waive their rights to bring legal claims in exchange for separation pay, severance, or some other benefit.
Employees should be sure they understand what any agreement waives before signing it. They should also be sure to understand that even if they agree to waive their right to sue, they still have the right to participate in an investigation for discrimination or harassment. This is true even if the investigation is brought by a federal agency like the Equal Employment Opportunity Commission (EEOC). Employees also have the right to participate in an EEOC investigation even if the claim is covered by a previous waiver. It is possible for an employee to waive the right to sue for damages after filing a discrimination charge at the EEOC. Employers should not discourage employees from pursuing such claims through the EEOC.
Sometimes, separation agreements spell out whether a former employee is eligible for unemployment benefits. However, even if an agreement says the employee is not entitled to unemployment benefits, that provision usually does not affect what happens if that employee applies for benefits from the state unemployment office. Generally, it is up to the state to decide whether the former employee is entitled to benefits.
More may be required if an employee has been laid off as part of a large or small reduction in force, under the Worker Adjustment and Retraining Notification Act (WARN Act). Under the WARN Act, for layoffs of 50 or more people in a single workplace, employees are entitled to either 60 days’ notice or severance, sometimes referred to as "pay in lieu of notice." If the layoff affects 500 or more employees at a single workplace, the same notice may be required, but the 60 days may have to be provided.
How the Employer Benefits
Employee Separation Agreements come with benefits. They also come with some risks. As with any type of contract, it important that the employer understand both the upside and downside of this document for the company. Some of the benefits in offering an Employee Separation Agreement may include:
Protecting Company Interests
In exchange for giving consideration (i.e., severance pay or salary continued for a period of time), the employee agrees to release claims against the employer which may be available even in the absence of a written agreement. Therefore, even though the agreement contains a release of liability, it is not truly "one-sided" if the employer receives something of value in exchange for the consideration given to the employee. The consideration received by the employer can certainly be worth the relatively small cost of preparing the agreement.
Minimizing Future Litigation Risk
The performance of the obligations of the employee under the terms of the agreement can also minimize the risk of future litigation. For example, if the separation agreement imposes confidentiality on the employee with respect to certain information, then if the employee were to breach that confidentiality, the company would have a basis to seek injunctive relief for such breach.
Confidentiality
Mandating that the employee sign an agreement allows the company to secure from the employee a promise of confidentiality with respect to certain matters. Employers may desire that the employees maintain confidentiality regarding internal memos, reports and other company documents that may contain proprietary information.
Negotiating the Separation Agreement
One of the most significant departures from the traditional employer-employee relationship may be when an employee is terminated. An employer’s immediate interest in that situation is to get the employee to sign a separation agreement. Because a separation agreement is a contract, it can be a useful tool for both parties to both identify the parties’ rights and obligations as well as to agree on a customized basis on how to terminate the employment relationship.
Separation agreements can be used to accomplish a number of purposes including: confirming the employment relationship has been terminated; confirming the date of termination; establishing a precise basis for which all parties will resign as to the insurance coverages maintained by the employer and by the employee; establishing an orderly process for the handling of accrued vacation time; and address non-compete issues. Because the terms of a separation agreement will vary based on the facts and circumstances, obtaining legal advice early on in the negotiation of a prospective separation agreement is critical.
The first step in negotiating a separation agreement is to review the employment contract and policies with the advice of counsel. After the employer has extended the offer of a severance package to the employee, it is crucial to conduct an analysis as to the leverage points available to the employee. The employee’s leverage points may include the following: After evaluating leverage points, the employee should consider whether there are any areas of exposure for the company if the employee were to sue the company. Despite an at-will employment relationship , employers can be sued for causes of action including wrongful discharge, breach of contract, violations of public policy, and violation of the wage and hour laws. Press releases, if not already confirmed, and correspondences from lawyers may indicate the possible potential issues and areas of liability for the employer. Discussing the potential claims against the employer along with the possible defenses that the employer might present provides the employee with a thorough understanding of the employee’s leverage points. Generally, the threat of litigation will persuade the employer to provide additional financial compensation.
Another key leverage point is the employee’s degree of reliance on the company garnered as part of the working relationship. Employees that have expressed long-term grievances, or that have accumulated credible third party witnesses may entice the employer to offer additional money to termination the employee-employer relationship. If the employer’s financial condition is less than satisfactory, then the leverage points lean favorably towards the employee.
Negotiating for a desired outcome will require the employee to create and build a narrative about his or her departure from the company. Any statements, online profiles, social media that contradict or negatively speaks about the individual may damage the employee’s net inputs in the negotiating process. On the contrary, any positive statements, online profiles, social media that favorably speaks about the individual may increase the employee’s net input in the negotiating process.
Common Pitfalls
The most common mistakes I see when an employee and employer draft and sign a separation agreement are: 1. Overreaching. Separation is a contractual negotiation between individuals with no relationship and outside of a collective bargaining agreement. It is neither a gift nor a punishment; it is an extension of the asset value of a severed relationship. There are many contributing factors that go into the size of any such asset and, during the negotiation, both parties need to adhere to the rule that the best offense is a good defense. If an employer makes unreasonable demands on an employee who is being separated without cause, the employee will likely wait for the employer to make an offer that the employee might accept before investing time or expense conspiring to disrupt the organization. Conversely, if an employee demands more than the employer is willing and able to offer, the employer will likely wait until the employee no longer has a champion inside the organization. That waiting game is the real battle ground.
If the separation agreement isn’t clear on the obligations of each party, the ambiguity will breed contempt. 2. Use plain language. The legal jargon of a separation agreement should be drafted as simply and briefly as possible. The best drafted paragraph explains to the employee his/her entitlement to severance, the deduction of wages from the final paycheck and the employees obligations to refrain from post-termination misconduct. It also forbids third party claims by the employee against the employer, including spouse-derived rights to loss of consortium. General releases are not effective if they are not specific to the particular employee. If an employee believes he/she is entitled to severance for good reason, or for termination without cause at an advanced stage of the employment relationship, those provisions should be excluded from the general release.
The employee should be made aware that the general release is a distinct clause from the specific releases. 3. Be wary of waiving statutory rights. While most offers to pay severance can and will be conditioned on the waiver of statutory rights, not much is gained by disclaiming statutory rights (like employment standards and pay equity) already more than adequately protected by the legal framework. Waiving statutory rights in a separation agreement will not work in a wrongful dismissal case if that case is pursued in court. A release cannot include rights or claims already unwaivable at law. Conversely, if an employer releases the employee from tenure in a unionized environment, it does so at its own risk. Despite the standard form severance, the employee may, under the collective bargaining agreement, be entitled to severance equal to the wages he would have received had he been employed over the term of the collective bargaining agreement. 4. Avoid too broad a general release. Employees are released from obligations and liabilities on a without prejudice basis including losses not yet sustained. There is very little benefit to waiving or releasing future liability to the employee. It is better to restrict the general release to claims already accrued and known to the employee. The cost of indemnifying the company at this stage is very low indeed. 5. Provide mutual benefits. The employer must ensure the employee’s right to a positive reference letter even if the employer is not required to complete the letter.
Bottom line: Employers should resist the impulse to starve negotiations by withholding financial support of the employee’s transition to new employment.
Legal Help
A separation agreement is a contract designed to protect both the employer and the employee in connection with the termination of employment. If drafted properly, a separation agreement achieves that objective, but it is very easy for an employer (or an employee, for that matter) to make mistakes that can be costly.
Given the potential pitfalls, it is advisable to have counsel review a proposed separation agreement before it is given to the employee. Although companies often enter into separation agreements without legal counsel, companies would be far better off by consulting with an attorney .
Some factors to consider when deciding whether to seek legal counsel in a separation agreement context include: Employers are often tempted to give an employee a "mass produced" template to be used any time that the employer and employee part ways. Not only may this be illegal (see our earlier post on "Employer in Violation of ERISA!"), but it is almost always not in the company’s best interest. Each situation is unique, though the circumstances may seem similar when comparing one separation to another. A skilled attorney will know what issues are likely to arise under the specific circumstances of your situation. While the overall economy has made it tempting to base decisions on whether to consult with counsel on cost, getting advice when implementing or reviewing a separation agreement is especially important.