What Employers Should Know About Settlement Agreements Before Terminating an Employee

In employment relationships, transitions such as separations or terminations are inevitable.  During these periods, employers and employees often negotiate a settlement agreement to clarify rights and obligations, ensuring a smoother transition for both parties involved.  Certain state and federal laws apply to these types of agreements and limit what an employer can impose upon departing employees.  An experienced employment attorney can help advise whether your settlement agreement will be enforceable.

What is a Settlement Agreement in the Employment Context?

Various agreements can come into play when an employee departs from a company.  Whether the agreement is called a settlement agreement, separation agreement, release agreement, or severance agreement, the provisions within these agreements usually cover similar obligations and rights.

Throughout this blog, we use the term “settlement agreement,” but keep in mind that there can be various names for this same type of agreement.

A settlement agreement is a legal contract between an employer and an employee detailing the terms governing termination or separation of employment.  These agreements aim to provide a framework during the transition period and the post-employment period by outlining rights and obligations for the departing employee.

What Are Common Terms Found in a Post-Employment Settlement Agreement?

1. Severance Pay: This is compensation provided to the departing employee, known as severance, often based on factors like length of service, position, and company policy.
2. Release: Frequently, settlement agreements will limit the departing employee’s right to pursue legal action against the employer. This is known as a “release” because the employee releases the employer from legal claims, typically in exchange for certain benefits or payments.
3. Confidentiality: Both parties typically agree to keep the terms and circumstances of the separation confidential.  Sometimes, the employee is also required to maintain the confidentiality of any information learned through the course of employment.  In some states, like New York, there are certain limits on confidentiality provisions in settlement agreements.
4. Non-Disparagement: This clause prohibits either party from making negative or derogatory remarks about the other.
5. Return of Company Property: The employee agrees to return any company-owned assets, documents, or intellectual property.
6. Post-Employment Obligations: This may include non-compete, non-solicitation, or non-disclosure agreements that restrict the employee’s activities after leaving the company.

What Terms Are Prohibited in a Post-Employment Settlement Agreement?

While settlement agreements serve to protect the interests of both parties, certain terms are deemed unenforceable or unlawful:

1. Waiver of Legal Rights: Employees cannot waive their right to file a claim for discrimination, harassment, or other unlawful employment practices, with the Equal Employment Opportunity Commission (EEOC).  Although an employee’s right to file a charge with the EEOC is protected, the employee can waive the right to recover damages in their own lawsuit, or in any suit brought on their behalf by the EEOC.
2. Gag Orders: Agreements cannot prevent employees from reporting or participating in investigations regarding unlawful conduct.
3. Unreasonable Restrictions: Non-compete clauses or confidentiality agreements that unreasonably restrict the employee’s future employment opportunities may be deemed unenforceable.

There may be additional restrictions on the terms that will enforced in a settlement agreement that vary based on state law.  For example, in New York, General Obligations Law §5-336 places strict limitations on what an employer can require a departing employee to sign in any agreement that releases the employer from sexual harassment, discrimination, and retaliation claims.  It is critical that employers take note of state laws when drafting settlement agreements, because in New York (for one example), one overstepping restriction could render the entire agreement void.

Conclusion

Post-employment separation agreements are crucial documents that provide clarity and closure during transitions in the workplace.  By understanding their purpose, common terms, and legal limitations, both employers and employees can navigate these agreements effectively.  Seeking legal counsel during the negotiation and drafting process ensures that the agreement aligns with legal requirements and protects the rights of all parties involved.  If you require additional guidance, speak with a member of our team for next steps.

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