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The Practicalities of Compiling Separation Agreements

A woman in glasses is looking at a piece of paper.

​Firing an employee is never easy. The conversation is sure to be uncomfortable, and the process itself can be a nightmare of both corporate policy and legal details.

Eager to avoid the threat of litigation, many companies go beyond requiring mounds of documentation of an employee's poor performance or improper behavior before cutting the cord: They'll press the employee to sign a separation agreement that documents his or her obligations to the company after departure in exchange for an agreed-upon severance payment.

But employers face a number of challenges in implementing a practical, enforceable agreement. For one thing, an employee is under no obligation to sign. For another, enforceability of certain provisions often varies from state to state. And, not least of all, government agencies are increasing their scrutiny of separation agreements as they uncover more instances of unenforceable conditions being included.

While organizations are under no legal obligation to offer a separation agreement—and usually face little legal risk if they don't, attorneys say—most advise their clients to put one on the table, anyway, if only to ensure peace of mind against possible future litigation.

Do You Really Need One?

"There's no real risk" to not having a separation agreement, said Lisa Hird Chung, an employment law associate in the San Diego office of Duane Morris.

"As a rule, I only insist on one if it's a layoff situation," added Steve Hirschfeld, partner in the San Francisco law firm Hirschfeld Kraemer and founder of the Employment Law Association, a network of labor and employment lawyers. "Beyond that, it's a judgment call. Maybe the company is concerned about the circumstances behind the dismissal or the employee has raised legal issues." In most cases, he added, "companies use them because they're risk-adverse."

However, Thomas D. Rees, partner in the employment law practice of High Swartz LLP, in Norristown, Pa., believes separation agreements are "highly advisable" when an employee is being dismissed for any reason short of major misconduct. "A separation agreement is absolutely necessary if the employer wants a release of all claims, particularly discrimination claims," he said.

Benjamin E. Widener, a shareholder in Lawrenceville, N.J.-based law firm Stark&Stark, agrees. If a separation agreement isn't required by a formal employment agreement or severance plan, the company should consider offering separation pay in return for the employee's release of any and all claims, even if no such claims exist yet. "It provides protection and insulation to the employer against frivolous (or nonfrivolous) lawsuits filed by disgruntled former employees," he said.

What to Include

If you decide to offer an agreement, what should it say? Most attorneys say it should cover:

  • The severance payment and terms the employee will receive on signing.
  • A general release from future litigation.
  • A provision to keep the terms confidential, with exceptions for spouses, attorneys and accountants.
  • A mutual nondisparagement clause that prevents both the employer and the former employee from denigrating each other.
  • The employee's agreement to return all company property.
  • The employer's agreement not to oppose an unemployment compensation claim.
  • A no-rehire provision, which precludes the employee from applying for or accepting a position with the company in the future. These provisions, Widener said, protect the employer from any claims that the worker either expected or has a legal right to future employment with the business and protects the organization from potential retaliation suits.
  • An "integration" or "merger" clause that specifies that this is the full and final agreement between employee and employer concerning the employment and termination. "The provision protects both parties from any argument that there was—or could have been—an ancillary verbal or written understanding that somehow modified the separation agreement itself," Widener said.
  • The federal Older Workers Benefit Protection Act, or OWBPA, requires that employees 40 and older be allowed 21 days to review the agreement before signing and then have seven days to change their minds afterwards.

In addition, special compensation provisions may be needed if the employer owes the worker commissions or deferred compensation, or if the employee owes the company for excess vacation leave or certain education and training costs. 

The Intricacies of Enforceability

Since separation agreements are legal documents, you'd think the question of their enforceability would be straightforward: If they have been properly drawn up and executed, both parties are bound by their provisions.

But especially for companies that do business in multiple states or jurisdictions, correctly compiling an agreement isn't necessarily a simple process. "You really need to consult an attorney, because it all depends on state law," Chung said. "There are so many nuances." For example, you might download a template from the web or even have your attorney draw up a companywide document that won't work in every state. "You have to do your due diligence to make sure you're maximizing enforceability," she said.

"It's important to tailor your agreement to a particular state," Rees agreed. For example, some states, like New Jersey, have protections against age discrimination that go beyond federal law. In that case, an employer may have to include provisions that in other states are only required for employees over 40.

Noncompetes are another area to watch out for. Because some states have limited their scope by legislation or court rulings, "noncompetes in severance agreements may raise questions," Rees said. For example, noncompetes generally are unenforceable in California.

Also, Hirschfeld notes, the agreements must be enforceable where the employee worked, not simply where the company is headquartered. "Every state is going to look at jurisdictional differences on case-by-case basis," he said.

And if the Employee Won't Sign?

Employees aren't under any obligation to agree with what you're proposing. "If the employee won't sign, the company has no recourse," said Hirschfeld flatly. The business "can offer more money or something like that, but if the company has a strong case [for dismissal], there's little risk of a lawsuit."

The employer "can either wait out the statute of limitations for a lawsuit or discrimination claim or try to offer more to the employee," said Rees, though he notes that the statute of limitations for contract claims is generally fairly long."

Another option is to put a time limit on the agreement: If the employee doesn't agree to your terms within a specified period of time, the agreement will automatically be revoked. "In this way, it will be clear that the offer is no longer outstanding after the deadline passes," Rees said. "The parties may negotiate an agreement later, but the baseline for negotiation will not be the employer's initial offer."

Finally, Hirschfeld believes it's important to keep separation agreements as simple as possible. "Some agreements are so long and convoluted," he said. "Keep it to a minimum. Keep it short and crisp, no more than three pages. For example, if the noncompete isn't enforceable in the state in question, don't include it."

At the end of the day, Widener said, "This really is case-by-case and depends on the facts and circumstances of the specific situation." Employers, he says, should confer with their attorneys to determine the appropriate action or strategy when a worker refuses to cooperate or sign the agreement.

Mark Feffer is a freelance business writer based in Philadelphia.

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