Separation Agreements for Employees: What Do Employers and Employees Need to Understand?

Employee Separation Agreement 101

A separation agreement, also known as an employee severance agreement, is a legal contract that exists between employer and employee in the event that the employee has or is about to be terminated. Both parties participate in the separation agreement process to collaborate on terminating the employment relationship on whatever terms both sides agree upon. The purpose of an employee separation agreement is to outline the terms agreed upon by both parties so that there is no potential for future litigation. Typically, these agreements specify the exact terms and conditions for termination, including, but not limited to, payment of damages such as severance pay, non-compete clauses , mutual non-disparagement terms, confidentiality rules, deadlines for payments and other compensation, and disclaimers regarding release of claims. They can also include language regarding any legal rights and remedies under relevant local, state, and federal laws and regulations.
Companies enter into separation agreements with employees before they are terminated or in most cases, immediately following termination. They are typically used when the separation result from a deliberate termination or a planned and voluntary resignation. They are not designed to be used where the termination has resulted from a serious circumstance such as theft, fraud, or a major policy violation.

Pros and Cons of an Employee Separation Agreement

The distinction that is being made here is that the Employee Separation Agreement provides both legal protections and financial benefits to both the employer and the employee. For the terminated employee, the Separation Agreement may provide a sum of money to the employee in exchange for a release of any claims that he or she may have against the company, i.e. common law or contractual breach of implied contract action. In exchange for his or her cooperation, the employee will have certainty about his or her post-employment obligations concerning any rights that may survive the termination of employment. This may include an obligation not to compete with the employer, not to solicit the company’s employees or clients, and to keep confidential information concerning the employer confidential.
In contrast, if no Employee Separation Agreement is executed, the employer may be forced to litigate any breach of the contract. This, of course, is costly and time consuming. It may also provide the employee with a basis to allege tortuous claims against the employer which provide the employee with compensatory damages, punitive damages, and attorney’s fees (if the employee is able to prove willfulness). In contrast, if the parties agree to enter into an Employee Separation Agreement, the employee is only eligible for the money set forth in the agreement, as his or her exclusive remedy. The employee also obtains certainty concerning his or her post-employment obligations, lessening the possibility of a claim for injunctive relief.

What Are Essential Components of an Employee Separation Agreement

Prior to the commencement of an induced, voluntary separation, many employers, and their legal counsel, will enter into negotiations with the departing employee to arrive at an agreement concerning his or her termination. These agreements will, at times, contain a variety of provisions resulting from the negotiation process. The most commonly agreed to provisions will be discussed hereafter.
A number of employees, upon receipt of a severance package, may forget to recognize that their existing obligations still exist and must be abided by. Obligations that will survive the termination of employment will often include confidentiality and non-competition clauses. It is advised that all employees read their employment contracts very carefully prior to accepting any offer put forth by their employer.
In certain industries, such as the financial sector, it is also common for employers to place "garden leave" clauses in their employment contracts. "Garden leave" clauses stipulate that the employee must remain in employment for a certain period of time and is paid, but not required to perform any work. During this period the employee is prevented from beginning new employment with a competitor, but also does not need to lose income while waiting for the contractual period to expire.
As to the employees that end up negotiating a voluntary separation agreement, the following will be the most commonly agreed to provisions:

• Severance Pay Severance pay can often be a matter of debate for both parties. Employers will wish to limit the amount of severance being offered, whereas employees will, understandably, wish to maximize the total amount of severance they are receiving. It is advisable for both parties to take note of the language used in the employment contract and how it may affect the payment of severance pay. The most common provisions in an employment contract will be concerning the notice period itself. For instance, if the language stipulates 5 weeks of notice and the employee is terminated without cause, the Employer is obligated to provide this pay in accordance with the contract, unless a more generous package is being offered. With respect to other provisions, one must take note of how they can be applied:
• Non-Competition Clause A key issue during many negotiations will be whether or not the employee will agree to a non-competition clause. Whether or not a non-compete will be enforceable will depend on many factors, including jurisdiction and type of industry. Typically, if a non-compete looks to extend beyond a period of one year, it will become increasingly difficult to argue that, despite having received consideration (money), the clause is reasonable under the circumstances. As mentioned earlier, depending on the industry, these clauses may be extremely important for the employer to protect their business.
• Waiver of Claims A waiver of claims is a provision used to ensure that the employee acknowledges that they will not bring a claim against the employer at a later date. Often it is a mutual waiver, in that, the employer will not bring a claim against the employee either. This provision is important as the employee must waive their rights under the Human Rights Code, or any other cause of action available to him or her.
• Confidentiality Clause Despite having already obtained the willing participation of the employee to sign a separation agreement, or to sign a general release, the employer may still wish to have them enter into a separate confidentiality agreement. This additional agreement will prevent the employee from disclosing the terms of the separation agreement to another party, unless doing so would be required by law. This may seem unnecessary, however, if it should ever come to a dispute, this clause will be essential. The last thing the employer will want to hear about at arbitration or court is the fact that the employee discussing the matter with an outsider and, as a result, it became public knowledge.
• Return All Company Property Finally, many employers will ask that their employees return any company property at the same time that they receive their separation pay. In addition, it is advisable to retain access to the employee’s previous works, in that, after the termination, the Employer may be required to provide these files to the successor.

Legal Issues and Compliance with an Employee Separation Agreement

Navigating the legal landscape when it comes to employee separation agreements is critical to ensure compliance with state and federal regulations and the enforceability of the agreement. State laws can vary significantly in terms of what is required, or prohibited, in these agreements. Therefore, it is essential for employers to know both federal and state-specific requirements and how they apply to different types of employees. Failures to follow these requirements can lead to prolonged negotiation and eventual litigation regarding the agreement’s enforceability.
Agreement to Waive Rights Under Each State or federal law that sets forth that rights that cannot be waived by the employee are generally preempted, meaning that an agreement to waive these rights will be invalid. The final EEOC rule regarding the Older Worker Benefit Protection Act (OWBPA) does not allow agreement waivers for rights under the Family Medical Leave Act (FMLA), Fair Labor Standards Act (FLSA), and Occupational Safety and Health Administration (OSHA). Therefore, employers should examine their agreements for these provisions to ensure that they do not violate state or federal laws.
Prohibition of Certain Provisions Provisions that attempt to automatically waive an employee’s rights under the National Labor Relations Act (NLRA), unless specifically permitted by the National Labor Relations Board (NLRB), will render the entire agreement void under Section 7 of the NLRA. Employers should remove or revise these provisions to comply with NLRB precedents and other federal and state labor laws.
Revocation Periods and Consideration Under OWBPA regulations, an employee must be provided a minimum of 21 days to review an agreement for both severance benefits and exit incentive plans. Section 1544 of the California Civil Code provides a right to revoke a waiver of indemnification under an employee’s employment contract prior to the employee’s signing the agreement of release.
No Waiver of Subsequent Claims Employers must ensure that there is no prohibition on subsequent claims. An employee who waives claims that arise after his/her termination will likely have that provision invalidated as against public policy. To bypass this issue employers can include a provision that persons employed by companies with ongoing business relations are allowed to bring any subsequent claims. Employers can also use a provision that states that the Agreement does not limit the employee’s right to file a complaint with a government agency (EEOC).
Employee Non-Disclosure Agreements Prohibiting Certain Actions Employees cannot enter into an agreement that prohibits them from voluntarily contacting a government agency (i.e. EEOC, OSHA) to report a suspected violation of antitrust laws. This prohibition does not apply if the information reported is a trade secret. Employers must therefore ensure that their trade secret provisions do not include information that can lead to a violation of federal law.
Agreements for Employees with Employment Contracts Employee contracts typically contain provisions that detail the employer’s obligations upon termination of the employee. The termination provisions in a separation agreement can be different from those in the employment contract. In order to avoid a breach of contract claim under the employee’s contract, the employee should be sure to incorporate the separation agreement into the contract language to avoid a conflict.
Arbitration Agreements Employers should ensure that waivers to arbitrate does not violate state specific laws. For example, arbitration provisions are prohibited in New Jersey and Maryland, which prohibits an employee from agreeing to arbitrate a claim arising under the Employee Retirement Security Plan.
Separation agreements are not one-size-fits-all, and each situation requires careful examination of the terms and provisions to comply with Federal, state, and local laws. Employers must ensure that these agreements are tailored to their specific needs and compliant with all laws to remain enforceable in the event a claim is made.

Negotiating an Employee Separation Agreement: A Practical Guide

Separation Agreements are a two-way street: employees and employers both have considerations when determining whether to enter into such agreements. For an employee, the separation agreement can provide financial security and closure, but also risk forfeiting employment rights. For the employer, a separation agreement can reduce the prospect of litigation, but not without the risk of forfeiting valuable information. Keeping the considerations of both employee and employer in mind can assist in deciding how to proceed .
Employees should consider the following before negotiating: Employers should keep the following considerations in mind: Employees and employers should also be mindful of what is not usually included in Separation Agreements. Typically, no standard form for a Separation Agreement exists, so each agreement is negotiated between the parties. Cached web pages of previous agreements should not necessarily be the basis of negotiation, as terms may have been changed. By keeping these issues in mind, a mutual understanding can be reached by both parties.

What Are 5 Common Employee Separation Agreement Mistakes

Careful drafting and individualization of the Separation Agreement is the best way to avoid future legal disputes arising from its terms. Unfortunately, standard or "boilerplate" terms are not always adequate because the specific laws that govern the broad bunch of promises made in the Separation Agreement vary from State to State.
For instance, California law affords an employee full reimbursement for business expenses, reasonable attorney’s fees and costs, and loss of earnings caused by a discrimination lawsuit. Severance agreements that waive those rights may be unenforceable. In contrast to California’s "protected status" laws disallowing discrimination on the basis of over 30 categories (such as age), some states only protect a few classes of employees.
Another common mistake is not providing enough time for the employee to consider the Separation Agreement. The Older Workers Benefit Protection Act (OWBPA) requires employers to give employees at least 21 days to consider the agreement before signing. The OWBPA also requires employers to give employees 7 days after signing to revoke the agreement. Failure to comply with these time requirements will void the agreement.
Employees should not use "cut and paste" Separation Agreements downloaded from the Internet, or agreements previously used for other employees. Each employee’s circumstances, including age, years of employment and potential exposure to litigation, must be considered when creating the Separation Agreement.

When Should an Employee or Employer Consult a Lawyer Regarding a Separation Agreement

When an employee separation agreement is on the table, the process of negotiating its terms can be burdensome. By design, these agreements often stretch over a long period of time. Even once a final version is presented, the majority of the contract may be incomprehensible to employees. But don’t be fooled – employees who sign separation agreements are forfeiting many rights that they currently enjoy.
This reality underscores the importance of seeking the counsel of an attorney familiar with the intricacies of separation agreements when negotiating a contract. It is essential that both parties to the agreement fully comprehend what they will lose as a result of signing away the rights. While it is not necessary in order to sign, an experienced attorney can assist both parties in the negotiation process and make sure that the most important rights are preserved.
Without consultation with an attorney, many employees sign away rights without even knowing it. For instance , if a contract includes a clause specifying that an employee will not be eligible to reapply for a position at the company after separating from employment, the employee is in essence signing away the opportunity to be considered for any future positions. While it is important to negotiate this upfront, many employees accept contracts with these terms without knowing the effect and scope of such a clause.
Even in a situation where the contract lacks these more obscure clauses, signing a separation agreement still often entails a considerable loss for the employee. The loss could be related to future or current payments, title, or rights on future promotions. Notable gains, like a significant salary increase or other benefits, also deserve consideration. An experienced attorney can help make arrangements to assure that a former employee is guaranteed the most benefits possible and safeguarded from major losses.