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Terms of Termination: Important Terms in Employee Separation Agreements
Terminating employees is an inherent part of virtually every type of business. Whether the termination is for financial reasons, poor performance, or because the employee actively and purposely caused harm to the employer (or “Company”, for the purposes of this article), it is important that the conversation and documentation are handled in accordance with the law, and in a manner that protects the Company should the termination result in litigation.
Under some circumstances, it may be advisable to present the terminated employee1 with a separation agreement, which, in short, typically provides a terminated employee with a specified amount of monetary compensation in exchange for his/her release of claims against the Company. Different circumstances will dictate specific verbiage. As but one example, a departing employee 40 years old or older must be provided with minimum time periods in which to review and sign an age claim release, but a release by an employer younger than 40 does not require specific time periods. Separation agreements may contain the following considerations and terms2:
Release of Claims
The basis of any separation agreement is to document the reason, terms, and conditions for an employee’s departure and for the Company to obtain a release from the departing employee of any and all possible claims against the Company, whether such claims are justified or not. Such a release should be clear and direct, and state that it is a release of all claims; past, present, and future, whether known or unknown; that the employee might bring against the Company in relation to their employment and termination. It may be advisable to specify certain claims that the terminated employee has indicated they would bring or that they could foreseeably bring given the circumstances that may have arisen during their employment. For example, if an employee is being terminated for poor performance but previously made an unrelated workplace safety complaint some months prior, the separation agreement might specifically mention that the employee “releases the Company from any and all claims of retaliation surrounding the workplace safety complaint they made to the Company on MM/DD/YYYY.” While general verbiage should provide a level of protection, being specific will work to further assist the Company’s defense should the terminated employee later bring a claim for that specific issue. It is also important to consider that some claims may not be releasable under state or federal law.
Pay
By its nature, a separation agreement is a contract and must therefore contain an offer, acceptance, and legal consideration, i.e., promise of performance by the Company, agreement to the terms of the promise by the terminated employee, in exchange for the terminated employee’s promise to release the Company from claims. Such performance by a Company is almost always in the form of monetary compensation to which the terminated employee is not otherwise entitled. It is customary to offer an amount of compensation equivalent to two weeks, a month, or sometimes more, of the terminated employee’s last rate of pay. Such separation compensation is separate and apart from compensation that the employee is already owed, such as salary earned but not yet paid (not unusual, since many Companies pay in arrears), or other pay if owed by the terms of employment or state law. Such compensation might include pay for unused sick time or paid time off (i.e., “PTO”), depending upon the Company’s policies.
Benefits and COBRA
Like with previously earned pay, a Company should consider its health benefits policy, including up to what date the employee has or will have paid into their plan. Oftentimes, health benefit plans are effective to the end of the month that an employee is terminated. This is important, since an employee who is terminated on the first day of a month will potentially have an entire month of benefits remaining, while an employee terminated on the last day of the month may find themselves without benefits the very next day. In either case, federal law requires an employer to provide the terminated employee with information about their group health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act (commonly referred to as “COBRA”). The separation agreement should make clear how the departing employee will be provided information about his or her COBRA benefits, which must adhere to a specific timeline initiated by the employment termination.
Non-Competition Covenants
Non-Competition covenants entered into prior to an employee’s termination are technical, frequently litigated, and subject to changing rules between the courts and legislature over time. Such covenants are beyond the scope of this article. However, it is important to seek legal counsel about the impact of separation agreements on non-competition clauses. For example, a Company may want to avoid provisions in a separation agreement that state: “This Agreement constitutes the entire agreement between the parties and replaces all prior agreements and understandings, written or oral, between the parties.” As another example, a Company and departing employee might mutually release all claims against each other in a separation agreement. Either of the foregoing could be argued to waive or release an employment agreement and thereby render a non-competition (or non-solicitation or confidentiality, etc.,) clause unenforceable by the Company. A departing employee will want to know whether a non-competition clause permits him or her to accept a new job with a potential competitor of the Company they are leaving. Either party, in most instances, would be well-advised to obtain legal counsel about the impact of a separation agreement on a non-competition covenant.
Non-Solicitation
Oftentimes erroneously conflated with a non-competition clause, a non-solicitation clause might be included and carefully worded to prevent the terminated employee from soliciting the Company’s other employees, clients, suppliers, or vendors to move away from working with the Company.
Confidentiality
Disclosure to a competitor, customer, or the general public about things such as the Company’s trade secrets, proprietary formulae, employee data, customer or vendor lists, or even the types of systems used by the Company can cause reputational damage, financial loss, and unfair competitive disadvantages to a Company. A separation agreement, although late in the employment and confidential information disclosure process, may include an agreed restriction against the departing employee disclosing such information to others, including a new employer. Even if a terminated employee signed a Confidentiality Agreement at the time of hire, at a minimum, the separation agreement should incorporate that Confidentiality Agreement by reference, and state that it survives the termination.
Non-Disparagement
A separation agreement may also contain a non-disparagement clause, essentially stating that one party will not make disparaging remarks about the other (these clauses might also be mutual). Such clauses take on added importance given the prevalence of electronic mass communications and social media, as well as the impact of reviews and comments on large platforms like Google. The Company should make clear that it will provide a neutral reference to any future prospective employers, which means the Company will only provide the dates of employment and the last job title held by the terminated employee without further commentary on the terminated employee’s employment or separation from the Company.
Other Standard Contract Terms
As stated earlier, a separation agreement is a contract between two parties. As such, other so-called “standard” contract terms – often referred to as “boilerplate” – might apply. Arbitration clauses, choice of law provisions, and disclaimers against admissions of wrongdoing, among other terms, while perhaps trivialized as boilerplate, may have significance in subsequent litigation and should be scrutinized for their potential impact. While separation agreements are a powerful tool and shield for Companies to use when terminating employees, it is imperative that they are carefully drafted to address special situations and avoid resulting in a violation of the terminated employee’s legal rights Therefore, it is important to seek the advice of a qualified attorney before presenting an employee with such an agreement.
Parrish Nicholls is an Associate with Henry Oddo Austin & Fletcher, P.C. His practice focuses on the outside corporate counsel needs of a variety of industries in the areas of business law, property owners association law, and employment law. This article is made available by the attorney and/or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law; it is not being made available to provide specific legal advice. By using this website and/or article, you understand that there is no attorney-client relationship between you and the law firm publisher or attorney author. This website and/or article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
1 For purposes of this articles, the term “terminated employee” refers to the current employee that may be subject to termination and not a previously employed individual.
2 Each individual circumstance may require specific treatment. For that reason, it is generally advisable to seek legal counsel when creating a separation agreement.
Nov 07, 2024
