Terminating employment can be a stressful time for both the employer and the employee. An employment separation agreement can help both parties reach a mutually beneficial end to their working relationship.
What are employment separation agreements?
When employers terminate a job, they may ask the employee to release them from any obligations or liability. Many companies offer an exiting employee a monetary bonus or settlement above and beyond their regular compensation. A separation or severance agreement is essentially the employer’s purchase of the employee’s agreement not to file a complaint with a government agency, not to take business to a competitor, or sometimes, to not even work for a competitor.
Standard clauses in a separation agreement:
The introduction names both parties and states employment and termination date. It may give a reason for leaving — or just say the employee is leaving.
Compensation clauses spell out the exact amount and nature of the compensation. It might be a structured plan in lieu of a lump sum. In that case, it should clearly state the date and method that the payment will be delivered.
Taxes and insurance sections outline tax deductions and payment schedules. In some cases, when the employee is part of a group health insurance program, the company will continue to pay his health insurance premiums.
Non-compete clauses restrict the employee from taking a job in his field for a set time or in a certain location in order to protect the company’s interests. It prevents the employee from working for the competition. A non-compete clause can have a major impact on future job prospects.
Confidentiality clauses demand that the details of the separation agreement remain secret.
Non-disclosure clauses specify what remains private such as trade secrets, customer lists and company finances.
Non-disparagement clauses outline what the employee can or cannot say about the company, its employment practices, and reasons for the termination.
Other clauses may deal with references, post-employment cooperation, the return of company property, and re-hiring policy.
Does an Employer have to offer a Separation Agreement?
Unless there’s a contract or agreement to the contrary, or obligations under the Worker Adjustment Retraining and Notification Act (WARN), severance isn’t necessarily required. Employees are entitled to wages to the final working day and to payment for all of their accrued vacation, but a company may let staff go without severance pay.
Even though employment separation agreements aren’t required, companies offer them to protect confidential company information or to protect themselves from lawsuits. In return, the employer gives the employee something of value (usually money).
A business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. If a lawsuit, complaint or any other factors of the employee’s exit is a concern, then it might be appropriate to offer a settlement.
However, offering an employee a severance or a separation agreement, sets a legal precedent within their company or create a belief of entitlement to such a benefit among employees. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale and the legal ramifications of using such an agreement.
An employer should not enter into an agreement with an employee if they have to engage an attorney anyway, unless the employer is reasonably sure that they’ll obtain a benefit from the transaction that they wouldn’t get in the normal course of business. Ultimately, as with most business decisions, whether to utilize an agreement or not is a cost versus benefit analysis.
Should an employee sign such an agreement?
After signing, an employee can’t take employers to court for wrongful termination. Just as the company has done, the employee should consider loss versus benefit.
Does the employment contract contain any mention of severance packages.
Does the employee handbook mention company policy on different reasons for termination. If it’s the result of company downsizing, for instance, the employee could be entitled to a severance package.
Does the agreement contain a clause preventing him from joining class action lawsuits?
Is the employer is seeking a release of all claims pursuant to the Age Discrimination in Employment Act (ADEA)? If so, there’s a 21/7 rule that applies. Under the rule, which is contained in Section 201 of the Older Workers Benefit Protection Act, a release of claims under the ADEA is only valid if the employee’s release is “knowing and voluntary.” More specifically, in order to be “knowing and voluntary,” the exiting employee has 21 days to review the agreement, with or without legal counsel, and has an additional seven days in which to revoke their signature (beyond the initial 21 day review period).
An employment separation agreement should protect both parties. Keep in mind, the company is offering the agreement so the employee will have no future claims. Is the severance package on offer worth that release?