Employment Separation Agreement Definition
Do you know exactly what an employment separation agreement is? What the purpose of it is? What it typically contains? Why an employer would want one (not to mention, why you would want one)?
Let’s take a look at each of these questions (or at least this author’s answer to these questions).
First, let’s take a look at the definition of employment separation agreements. Employment separation agreements are ones that employers enter into all the time with terminated employees, all the time with employees when they are laid off from a mass layoff and also an employer enters into with instituting layoffs when a workforce is being reduced.
An employment separation agreement essentially lays out, for both the employer and employee, the respective rights and obligations that each party has going forward. Most importantly, perhaps, is the fact that an employment separation agreement is a legally binding document, which means that it is enforceable by a court or judge (i.e., you can’t just disregard the terms of it once signed). Presumably, then, you would want one if you were receiving some sort of consideration under those terms.
So, what is the purpose of an employment separation agreement? The purpose of an employment separation agreement for the employer is typically to: (i) offer structured severance payments to terminated employees and reduce the overall financial burden upon the employer; (ii) prevent litigation with the terminated employee; and (iii) gain finality and certainty that the employment relationship has ended on mutually acceptable terms .
The purpose of an employment separation agreement for the employee is typically to: (i) obtain some severance in exchange for executing the employment separation agreement; (ii) agree to release a variety of claims against the employer in exchange for the severance payment (along with confidentiality and non-disparagement obligations/representations); (iii) release claims that are unknown at the time; and (iv) agree to cooperate, etc., post-termination.
What an employment separation agreement typically contains is typically: (i) a severance number and formula; (ii) a recap of the obligations that the employee was under, which can include restrictive covenants (i.e., non-compete, non-solicitation and confidential information obligations) and confidentiality obligations; (iii) a release of claims (a variety of different ones) that the employee had against the employer and its affiliates; (iv) a release of unknown claims and non-monetary consideration obligations; and (v) mutual confidentiality and non-disclosure obligations.
Why do employers want employment separation agreements? Because it limits employers’ exposure to liability for all claims that the employee has at the end of the employment relationship and, presumably, in exchange for what the employer pays the employee and gets them to sign an employment separation agreement.
Legal Requirements: Do I Have to Sign?
Even if your employer provides nothing more than an index card or a handwritten note documenting the termination of your employment, you have no legal obligation to sign anything beyond the discharge itself. Your employer cannot force you to sign an employment separation agreement and cannot make your signature a condition of continuing a relationship with them.
However, in some cases, a federal, state, or local law requires an employer to provide something in writing documenting the employee’s date of termination. If your employer terminated your employment without providing any sort of language in writing documenting the termination, or without supplying the information required by the law, it might be worthwhile to consult an attorney to obtain what you could be owed.
Pro’s and Con’s of Signing
A separation agreement offers the company more than it offers the departing employee. By signing, employees may give up valuable claims against the company in return for severance. Employees should consider what claims they really have against the company. Do you have an age discrimination claim? Are you entitled to overtime pay, but have never received it because you were misclassified as being "exempt"? If an employee has real claims, the employee should feel compelled to bargain for the right to keep those.
A common component of a separation agreement is a confidentiality provision. When a company terminates the employment of several people, such as in a layoff situation, the company very well may provide a confidentiality provision in the agreement. The company may not want other employees knowing how much severance $XYZ employee received, so a confidentiality provision is typically included in the agreement. You should closely examine the confidentiality provision before signing the agreement. In one case, an employer was forced to pay additional money to a terminated employee when its confidentiality provision prohibited the employee from disclosing the separation agreement to anyone other than an authorized advisor. In this same case, the employee’s limited disclosure to his new employer resulted in the court’s conclusion that the company had breached the implied covenant of good faith and fair dealing by enforcing the confidentiality provision against him.
Another provision that may run against the best interests of a departing employee may be a non-compete provision. A separation agreement offering severance may be difficult for an employee to turn down, particularly in today’s job market. If the company has fired you and includes a non-compete provision in the separation agreement, then you have very little leverage to negotiate a better deal. If the company is laying off many employees, then the non-competition and non-solicitation provisions of the separation agreement may be negotiable.
Again, when deciding whether to sign an agreement offered by a company, employees should carefully weigh the time and expense that it may take to pursue claims against the likelihood of recovering something of value through the legal system. Of course, every situation is different and each should be analyzed against the plans for future employment.
Key Provisions
Accounting for the special circumstance and contract issues I mentioned above, employees should not sign an employment separation agreement without circumstances warranting doing so. In most instances, this means the employee is getting something in exchange for signing the agreement. Below are the most important clauses and terms that should be included in any employment separation agreements and which the employee and the employer should carefully consider before executing.
Confidentiality. The employment separation agreement should include a mutual confidentiality provision—meaning both parties are precluded from divulging the terms and conditions of the employment relationship to anyone else, except their attorneys, as needed, or as otherwise required by law.
Release of all legal claims. If the employee is going to sign a release of any legal claims against the employer, then the employer must also agree to not pursue any legal claims against the employee.
Non-Solicitation/Non-Compete. Many employers require their employees to sign covenants not to compete or pay back valuable benefits if they resign and immediately work for a competitor. For this reason, the employer must agree to waive any rights it has to enforce such covenants.
No disparagement. Both parties should agree not to disparage the other after the date of execution of the employment separation agreement.
Mutual release. As indicated, the release of all claims against the other is mutual under the employment separation agreement, which means the employee and the employer are signing the agreement with the understanding that the employer is also giving up its right to pursue any legal claims against the employee.
Conditions precedent. The day of closing on a commercial real estate deal can be a tense affair, with the parties checking and re-checking to make sure everyone has met all of the conditions agreed upon. The same thing goes here: the employment separation agreement should include a provision stating that neither the employee nor the employer will execute the agreement unless all other parties to the agreement have executed the agreement.
Arbitration of disputes. Parties to a contract litigate their disputes in court, assuming there’s no arbitration clause. Parties to an arbitration agreement will litigate their disputes in front of one or three arbitrators (a panel of three is the norm for international arbitration, but most domestic arbitration will be decided by a single arbitrator). An employment separation agreement should state whether any subsequent dispute will be submitted to arbitration.
What to do Before Signing
It is recommended that employees obtain legal advice before signing. The only way to protect your legal rights is to review the Agreement with someone who knows the pros and cons for you. Negotiating the terms of the Agreement is a very beneficial step in the process. Most employers are open to suggesting modifications to a contract. Be specific with your requests and identify why the requested change is important. Give your employer reasons for changes , reference potentially conflicting policies, offer to give something in return, or ask for consideration after signing if you want more than is being offered. In addition to legal advice, taking time to think about the terms of the separation agreement is critical. An employee should request time to review the Agreement with counsel prior to signing, communicate specific concerns or questions, and then request a reasonable period of time to consider the Agreement before signing.
What to do Besides Signing
There are always alternatives to signing a separation agreement. In many cases, we will hear from a client contemplating whether to sign an agreement or consult with us with respect to drafting a separation agreement that will be presented to the employee. Our clients sometimes believe that because they are offering the employee "more money" than that person is entitled to that they will not have a problem with the employee in the future. We caution them that if the money that is being offered is not an acceptable amount for the employee to sign that release, that person will likely not sign the release. If the employee chooses not to sign the release, our client must be prepared to have a plan in place to handle any litigation that may result from that decision.
In many cases, we have witnessed significant delays in employers making a decision to settle sexual harassment complaints or non-compete violations by former employees. Those cases usually involve a negotiated resolution due to the publicity surrounding the matter, the reputation of the company and/or the executive involved. A business decision is made at a point in time and sometimes the owners, executives and HR professionals involved forget why a decision was made or become confused regarding the impact of a decision elsewhere in the company.
On the other hand, should the separation agreement not be signed by the employee, and the business does not want to negotiate a different agreement, the case can be resolved through either mediation or litigation with the expenditure of counsel fees on both sides. If we represent you in that context, we will explain to you the alternatives, the risks and the costs involved. Even if the case settles, as sometimes happens, there will be a transition period when the employee will move on with his or her life. There are clients who object to paying employees to sign release agreements but who do not object to paying counsel fees to defend litigation or pay a settlement to resolve a lawsuit.
Thank you for taking the time to learn more about this employment law topic. While this blog post is only general information, I would be happy to speak with you about your specific situation in a paid consultation.
Case Studies and Examples
Real-life examples and case studies can be particularly enlightening when it comes to understanding the impact of employment separation agreements. An example of a situation where signing the agreement has made sense was in the case of a long-term executive in the telecommunications industry. The company had decided to downsize its headquarters and eliminate the executive’s position. The executive was offered a generous severance package and, in addition, was asked to sign an agreement containing some restrictive covenants – conditions that would restrict the executive from working for a competitor or starting their own competing business. Even with the restrictive covenants, the compensation offered to the executive was so generous under the circumstances that it at least partially justified signing the agreement. In addition, the company had told the executive that they wanted to have an amicable parting and planned to offer the executive a lucrative consulting contract the following year.
Never sign an employment separation agreement based on someone else’s experience. In one of my initial meetings with a prospective client, the client referred to his neighbor who had signed an employment separation agreement with a large company several years ago and received a substantial payout as a result. (I later learned the neighbor was a low level employee with few negotiation options.) The prospective client didn’t want to risk losing the "guaranteed" outcome his neighbor had received. This prospect had very limited negotiating power and trusting anything the potential employer said about his neighbor was not in this client’s best interest.
Another example of the importance of carefully evaluating whether to sign the employment separation agreement is from a case in which I represented a sales executive for a SaaS company. The client had received a lucrative offer from a competitor and was negotiating his employment agreement with the competitor. The current employer’s employment separation agreement had extensive restrictive covenants , but his new employer had no such restrictive covenants. As it turned out, the client’s current employer had been negotiating more restrictive provisions than were required by the newly proposed law. We were able to effectively negotiate the elimination of most of the restrictions.
One of the common pitfalls of entering into an employment separation agreement is that the employee quickly signs the document before giving it thoughtful consideration. In addition to signing without consulting an attorney, the exiting employee often also fails to review the agreement against agreements signed with any prior employers. It is not unusual for the departing employee to discover, only after entering into an agreement with the new employer, that he or she has inadvertently breached his or her agreements with the former employer.
In contrast to the more common situation of ineffective negotiations, the executive mentioned previously was able to successfully negotiate the elimination of most of the restrictive covenants. The executive did so by persuasively submitting to the company’s HR department that, in most parts of the United States, there are no legal restrictions on competing after 6 months. Although employees in California usually do not have to worry about restrictive covenants, the executive resided in another state in which the law was different. The company administration, in the end, was convinced that an executive of the employee’s stature would reasonably be bound by post-termination restrictions of 6 months or less.