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May 28, 2021 | BusinessFrom the blog

What is a Separation Agreement?

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When employees leave a company, employers are often concerned about future legal claims or a former employee engaging in conduct detrimental to the business.  This is of particular concern in the event the employee’s offer letter doesn’t include comprehensive restrictive covenants which would apply post-termination.  To address this, many companies will offer a severance or separation agreement with certain provisions that minimize these risks.  The separation agreement sets forth the terms of the separation, including giving the employee severance pay and/or a benefit package in exchange for waiving his or her right to sue the company or engage in specific conduct.  While employers have flexibility in determining the provisions of the separation agreement, they must comply with the employer’s policies, the individual employee’s employment agreement, and any applicable laws.

Key Terms for Employers

The purpose of a severance agreement is to protect the employer.  As such, it should be drafted by an attorney to minimize the risks of liability or other financial harm to the business.  Common provisions of concern to employers include the following:

  • Release of claims. This clause states that the employee waives his or her existing and/or future right to sue the employer in connection with their relationship and termination from the company. Note that some types of claims cannot be waived or there are additional legal requirements that must be met for the release to be valid.
  • Non-disparagement. Employees may be prohibited from privately and publicly disparaging the employer.
  • Non-solicitation. A non-solicitation clause prevents an employee from soliciting customers, other employees, or suppliers of the former employer.
  • Non-compete. A non-compete restricts the employee from working in a specific type of role or in a certain industry for some period of time and within a certain geographic area.  Non-competes must be reasonable in the scope of the prohibited activity, geographical scope, and time period.
  • Confidentiality/Non-disclosure. Employees will be prohibited from using or disclosing proprietary information, such as trade secrets and client lists.  It may also require the employee to not disclose the terms or fact of the separation agreement.
  • Employer’s remedies. The agreement should state the employer’s rights to recover attorneys’ fees and litigation costs from the employee in the event of litigation.

Key Terms for Employees

Employees may feel at a disadvantage in negotiating a separation agreement.  However, good legal advice can help them protect their legal rights and obtain more favorable terms.  Important provisions for employees include:

  • Employees may negotiate the amount paid as well as when and how they receive their severance.
  • Non-disparagement/references. The agreement can provide that the employer will supply a “neutral letter of reference” (only verify the employee’s dates of employment when prospective employers contact the company for a reference), preventing them from badmouthing the employee to potential future employers).  Further, the employer can be prohibited from making any disparaging comments about the employee.
  • Although less common, an employee with enough leverage may be able to get:
    • Release of claims. The employer may be required to waive any existing or future claims against the employee.
    • Unemployment insurance. The agreement can state that the employer will not oppose any claim by the employee for unemployment insurance.

Age Discrimination in Employment Act (ADEA) Waiver Rules

Generally, a waiver or release of claims in a severance agreement is valid provided the employee knowingly and voluntarily consents to the waiver.  However, the standard used to determine whether a release is “knowing and voluntary” varies depending on the statute under which a lawsuit has been, or may be, brought.  Among the strictest requirements are those under ADEA.  The ADEA rules are established by statute rather than caselaw.  The law requires the following:

  • Plain language. A waiver must be clearly understandable and drafted in plain language geared to the level of comprehension and education of the average individual.
  • Reference to ADEA. The waiver language must specifically refer to ADEA.
  • Opportunity to consult with counsel. Employees must be advised to consult an attorney before accepting the agreement.
  • Time to accept. Employees over the age of 40, generally have 21 days to consider the terms of separation. However, where employees are part of a group termination, they have 45 days.  There is no statutory time period for employees younger than 40, but the time given to such employees may be a factor in determining whether a waiver of claims was “knowing and voluntary.”
  • Revocation Employees over the age of 40 have 7 days after their execution of the separation agreement to revoke their acceptance of the waiver.
  • Consideration for waiver. The agreement must offer employees something of value that he or she is not otherwise entitled to in exchange for the waiver.  
  • Future claims.  The agreement cannot require employees to waive their right to sue for discrimination that occurs after the execution of the agreement.

Conclusion

Separation agreements provide valuable benefits to employers and employees. However, they should not be drafted or negotiated without legal advice. A poorly drafted agreement can result in legal liability and/or significant financial risks.

Photo by Mari Helin on Unsplash

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