The Work Separation Agreement Guide: What You Need to Know

What is a Work Separation Agreement?

A work separation agreement is a written contract that provides an employee leaving the company with something of value in exchange for signing the agreement. Usually, the employee must promise to give up further legal claims against the company and agrees to additional covenants such as non-competition and non-solicitation. A valid agreement is intended to release the company from legal claims that may have arisen during the employment relationship. The company, however, generally continues to hold the right to terminate the employee at any time without cause. Although a separation agreement is a contract, it does not allow for a lawfully requested accommodation or termination by the employee.
Separation agreements involve a delicate negotiation between an employer and an employee as to what benefits and consideration the employer will pay in order to prevent further litigation and claims. The common contract language includes the types of benefits that are provided to an employee who leaves the company. Typically these benefits include: a paid period of notice (for example , a compensation "stay on" period), use of a company car until the severance is paid out or use of a company laptop during a transition period.
The most valuable benefit that the company can provide to obtain a separation agreement is the promise of financial compensation in the form of a lump sum payment. However, that benefit will not persuade every employee to sign a separation agreement. For example, the inducement of a lump sum payment may not be effective where the employee is the subject of an ongoing personal conflict with the employer or other employees within the company. When a valid separation agreement is disputed by the employee, however, there is little a court can do to set aside a previously negotiated agreement when it has been drafted well.

Components of a Work Separation Agreement

Typically, a work separation agreement is a contract between an employer and an employee or former employee in which the parties agree (often under threat of termination or legal action) to the cessation of employment in exchange for some severance consideration. The consideration is usually monetary, but can also include things like continued medical coverage or outplacement services. In addition to the resonant monetary value, the work separation agreement will usually contain other conditions of separation: a release of all claims, confidentiality provisions, non-disparagement provisions and non-compete clauses among them. Employers can also use waivers in work separation agreements where the terms of the work separation agreement are not to be shared with any third parties.
Work separation agreements like this are almost always favored by employers because they keep settlement terms confidential, thereby avoiding unintended disclosure of the terms and preventing subsequent employees from using the terms of the original agreement as leverage. For their part, employees also tend to be in favor of such agreements because they can negotiate more favorable benefits in a voluntary separation than in a discharge.

Advantages for Employers and Employees

The decision to part ways is not an easy one but for the employer, the advantages of a work separation agreement often outweigh the disadvantages. When faced with the prospect of terminating an employee, a work separation agreement provides the employer with flexibility in dealing with a difficult situation. It can also save the employer the time, effort, and costs that are often associated with a dismissal. A work separation agreement can eliminate the need for litigation and provide finality to the circumstances between the employee and employer. It can also be an opportunity for the employer to portray a positive image of its business as well as the professionalism of the organization. Through a work separation agreement, an employer has the ability to leave on a positive note and thus fortify any parting of employment as mutual, even when a termination is the final result.
For employees, a work separation agreement is often advantageous as it provides them with important reference points to prepare for their life after the loss of their job. Specifically, work separation offers employees comfort by providing them clarity about the current state of their employment contract and the terms by which they will separate from their employer. A work separation agreement provides employees the opportunity to avoid drawn out legal processes, increasing their chances of moving onto another job or undertaking other career opportunities. Additionally, for terminated employees, a work separation agreement provides an opportunity for the employee to gain additional severance pay or other benefits that would not otherwise be available to them in a dismissal situation.

Legal Requirements and Guidelines

When it comes to the legal considerations of drafting and executing a work separation agreement, the first major issue is compliance with both federal and state laws. For example, federal law requires an employer to provide a terminated employee with Cobra continuation coverage. For a business with 20 or more employees, this means providing the terminated employee with information about the availability of medical insurance continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), and providing such coverage if elected by the terminated employee. For businesses with fewer than 20 employees, an employer must still comply with the COBRA notice requirement, but is not subject to the requirement to provide medical insurance continuation coverage. While there are exceptions (for instance, for the termination of a plan or termination of employment due to gross misconduct), an applicable business would be well advised to offer COBRA coverage as part of any separation agreement to avoid potential liability under federal law.
As for state law, each state has its own rules for separation agreements. For instance, in Florida, while it does not require employers to offer separation agreements to terminated employees, it does impose a heightened standard for separation agreements with respect to certain categories of employees, which includes employees age 40 or over. In general, for an agreement to be enforceable against an employee over the age of 40, the agreement must require the advising employee to consult with an attorney prior to executing the agreement. Additionally, the agreement must not be executed until the employee has been given at least 21 calendar days to review the separation agreement and to consider all aspects of the proposed deal. If the employee ends up rejecting the agreement, the provision requiring the employee to receive 21 calendar days from the separation agreement offer to review the agreement is effectively nothing more than a wasted effort – the employee simply cannot accept the offer of separation until that time has fully passed. Furthermore, even after 21 days has passed, the employee has a right to revoke his or her consent to the agreement up to seven calendar days after giving it. As a result, the earliest that the employer could potentially enforce the separation agreement would be 28 calendar days after it first presented the separation agreement to the terminated employee.
Moreover, if a business has employees in multiple states, it is important for the business to familiarize itself with the separation agreement requirements of each state it is operating in. In Washington, for example, if an employee is 40 years of age or older, an employer must provide the employee 60 calendar days to consider whether to sign a separation agreement. Those employees must also be advised to consult with an attorney before signing the separation agreement, and have 7 days after signing the separation agreement to revoke their acceptance of the separation agreement.
Regardless of any state’s requirements, however, requirements for separation agreements detailed in applicable business policies – such as employee handbooks, or after-acquired "separating" policies – may require a business to provide its other employees similar opportunities to review or sign a separation agreement.
Finally, whether the business has to offer a separation agreement to a particular employee depends on many factors – including how the employee leaves the company. So-called "voluntary" terminations, like layoff, downsizing, job elimination, and even just resignation, may be treated the same as if the action were involuntary, for purposes of separation agreements. Drafting the language in your policies so that such terms are reasonably defined will help make sure that the employer follows the spirit of the policy and provides employees a separation agreement when really a separation agreement is appropriate and justified.

Negotiating a Work Separation Agreement

In negotiating the terms of a work separation agreement, both parties should be open-minded about the terms under consideration. In other words, the parties should be prepared to listen to each other and hopefully with an open mind.
Of course, the circumstances regarding reaching a work separation agreement vary significantly. The circumstances can be hostile or amicable or somewhere in-between. In a hostile situation, it is important to negotiate in good faith and be really prepared to listen to the other side. Remember , a disgruntled employee may take the position NOT to accept the severance pay for a non-disparagement/non-competition agreement.
Consider the following approach to negotiating a work separation agreement:

• Both parties must be ready and willing to address the many issues that come up in all such agreements of this sort.
• Consider taking on an outside third-party to address questions and concerns in a confidential environment to foster a smoother process.
• Be open to any concerns raised by the other side and be willing to justify why you are looking for your position.
• Think about being transparent if making a counter-offer or new demands.
• Work through the procedural issues, i.e., where and when to meet to work out the issue, which parties are involved in the negotiation for each side, etc.

What you ultimately negotiate will not be the product of one party simply dictating terms to the other. Rather, both sides must be able to express and address their interests and concerns.

What to Avoid When Drafting a Work Separation Agreement

When employed as counsel or as an expert evaluator, we have seen many of the same mistakes time after time that are frequently incidental to work separation agreements. While this is not an all-inclusive list of errors, here is a basic list of mistakes parents, lawyers, HR staffs and employers should look for when preparing or reviewing a work separation agreement. Any type of work separation agreement must also partner alongside or with a divorce or separation agreement, if appropriate, in order to avoid issues down the line.
Mistake 1: Not taking into the account what the expense of having to hire an expert may be and/or what is reasonable in terms of having the expert do litigation consulting or perhaps even a full evaluation.
We have seen situations where a separation agreement stated that the employee was making a set amount of money and agreed to the value of not just their business, but the working capital associated with that business. There was no recognition of the fact that the employee’s assessment of the working capital may not be accurate and not all of the things that he or she believed made up the working capital would be deemed such by an expert. We have seen situations where a pro-rated bonus, incentive plan or even employer-paid benefits were included in the valuation when the business owner’s attorney should have recognized such things would be deducted from the total amount of goodwill or property settlement.
Mistake 2: Not being specific enough in terms of allowances, non-competition and non-solicitation.
We have seen situations where the work separation agreement fails to specify things such as an employee receiving a verbal suggestion from an employer that they should not compete within a set period of time after leaving employment and failing to define what a non-compete is and when it begins to run. For example, an agreement that states "I will not compete with you for six months" is not specific enough for a court to enforce against an employee. Similarly, there should be a definition of when that non-compete begins to run. Is it upon termination of employment? Is it upon the execution of the agreement? There should be a provision that resolves the issue of when the non-compete begins and the timing of the non-compete.
Mistake 3: Lack of confidences and non-disparagement in an agreement
We have seen many circumstances and situations where an agreement doesn’t have a properly drafted confidences and non-disparagement clause. Such clauses might include specific amounts of money agreed to be paid or the value of the divorce settlement. Our recommendation is that confidentiality provisions state at a minimum what the parties agree that they are discussing, that they will not discuss the terms of the agreement with a third party except as required for certain taxes or new employment, and that attorney fees and expert fees will be shared for any future enforcement of contingent costs contemplated under the agreement.
Mistake 4: The timing of an agreement or the need for certain contingencies or requirements, such as the filing of a tax return that is implied or required as a condition precedent.
This means that your agreement should have the parties specifically acknowledging that they have read the agreement and have had an opportunity to consult with legal counsel. Additionally, an employer should insist upon having a stand alone acknowledgement of rights so that it cannot be argued later on that an employee was not aware of his or her rights by virtue of having signed a separation agreement.
Mistake 5: Not addressing the complete issue at hand or that which could arise later on.
We have seen situations where employer is obligating itself or its insurance company to make further payments for a period of time as long as the employee is not drawing unemployment. Or employer is including some form of severance of benefits after a certain date, say two years. Such things could become problematic in the future when there are disputes as to who owes what to whom, or where the employee claims that the benefits are still due and the company states that they are no longer owed.
Mistake 6: Assumptions and not seeking out legal advice from an attorney well versed in such issues.
We have seen deals struck between lawyers where one party is taking a risk simply because the lawyer representing the party lacked sufficient experience and did not consult with someone with experience in valuing the assets that are addressed in the agreement or did not otherwise address the potential pitfalls involved in the agreement.
Mistake 7: Committing to very large amounts of money or amounts that the parties simply may not be able to recognize or obtain in the future (e.g., farm land, timber, natural gas drilling, etc).
We have seen values placed in a separation agreement where the business value has not been reviewed in a number of years and now the value is substantially lower than the parties had considered because certain events or due diligence studies were conducted and none of the values were adjusted pursuant to the agreement. In other words, if you continue to value timber at $60 per ton and the timber value is now only $30 per ton, you are now going to be making payments to a spouse at an inflated rate. So the interest on that valuation to come up with the value is substantially diminished.
Mistake 8: Failing to take into consideration legal fees.
We have seen situations where an employee has taken a less talented attorney than what his or her spouse has hired simply because the spouse hires every attorney that his or her lawyer refers to them yet the parent with the less talented attorney signs the separation agreement without the benefit of having it reviewed. This means mistakes are made.
We have seen situations where parties have used one attorney to draft the agreement and a second attorney to review the agreement. That obviously skews the negotiations and causes mistakes to occur.
Mistake 9: Not recording all of the expenses addressed in the agreement.
Today’s agreements are much more complex and sophisticated than they were a generation ago. Family law attorneys and even some forensic experts need to be alert to the issues that can arise when a person signs a work separation agreement. Even some accountants are not attuned to the events that take place. Separation agreements require a separate level of expertise.

When to Consult an Attorney

You should seek independent legal advice at many different stages in your employment. In addition to the more obvious occasions for legal advice (such as when being terminated), there are many other situations in which legal advice can help resolve issues before they arise. If you have concerns about how you are being treated by your employer, such as a potential constructive dismissal or if your rights are being denied, a lawyer experienced in employment law will be able to provide you with advice about the best way to deal with the situation and to protect you against a potential breach of your rights. If you have been offered a different position , or a pay cut, be aware that you do not have to accept those terms proposed to you. You should know what you are entitled to and be alert to the potential for constructive dismissal when that happens. If you leave a job voluntarily, consider getting legal advice to assist you to draft a professionally prepared reference letter from your former employer for your future job search use. Many lawsuits are started due to ambiguous or inaccurate professional references and so it is a good idea to obtain one that is legally defensible in order to protect your interests.