What Exactly Is An Employment Separation Agreement?

Often times Employers need a way to release the company from any potential claims or liability when the decision is made to terminate an employee, and to accomplish this, companies will generally use an employment separation agreement. Basically, it’s a means for the parties to end the professional relationship in an amicable manner and can help to prevent future misunderstandings.

Although companies utilize employment separation agreements to protect confidential company information and as a safeguard against lawsuits, they are not required by law. After signing a properly drafted settlement agreement and release, the employee is legally prevented from suing the employer for wrongful termination or additional severance pay.

Which brings us to the question… Should you sign an employment separation agreement?

Terms of the Agreement

The separation agreement should contain binding legal verbiage and detail all of the terms that the parties have agreed upon. It is important to carefully review the agreement as it will supersede any other agreements, including your employment contract. Standard provisions typically include some or all of the following:

Specifics of the Separation  The agreement should  identify the parties involved, the employment commencement and termination dates, and the fact of termination, which it may specify with a reason (i.e., layoff, resignation, termination), or plainly state that the employee is leaving the company.

Severance Package – This is a discretionary term and it may or may not include monetary compensation. The only requirement by law is that an employee must be paid all of his or her earned wages through the last day of work, and if required by company policy, any accrued but unused vacation. If it is company policy that accrued but unused vacation also often referred to as PTO is “use it or lose it,” by law it need not be paid out upon cessation of employment. Of course this can be negotiated. It should be noted that even the largest of companies have laid off staff without offering any severance pay.

If you have an employment contract, review it carefully as the terms would generally govern severance packages. Remember, it’s in the company’s best interest if you sign a separation agreement so that you are prevented from having any future claims. You must decide whether the severance package is worth that release.

You should also review the termination section of the company’s employee handbook, paying specific attention to the policies applicable to different reasons for termination.  For example, if the termination is due to downsizing you may be eligible for additional payouts or a severance package. Severance does not necessarily mean cash, it may also be given in the form of benefits. Companies are required to follow their plans.

Amount and Method of Delivery – When the compensation offered is in the form of wages and/or other payouts, the separation agreement must detail the exact amount and nature of the compensation. Whether the payout is a lump sum payment or a structured plan, it should always specify the date and delivery method. The agreement must also define the duration and payment structure for severance paid over a fixed period.

Tax and Insurance – Tax deductions and payment policy will be outlined in the agreement, and in some situations, the company will continue to pay into the employee’s health insurance. If you are part of a group health insurance plan, for instance, this may be the case. If it is a larger company, you may be eligible for COBRA benefits.

Non-Compete Provisions – A non-compete clause will prevent you from entering into a similar position in the same field for a specific period of time or within a geographic area, or both. This clause is another way for the company to protect their own interests and basically prohibits you from working for one of the company’s competitors. Signing a non-compete clause may dictate the direction of subsequent job prospects, so ensure that you fully grasp the terms and its implications before you sign an agreement containing a non-compete provision.

Confidentiality/Non-Disclosure – Some companies require a non-disclosure or confidentiality agreement to ensure that the separation agreement terms and conditions remain confidential. It may also include information learned during your employment. Read this carefully to ensure you understand your obligations and that you can agree to them. The agreement should explicitly define the information that is to be kept confidential (e.g. trade secrets, company finances, customer lists, etc.).  Exceptions to the non-disclosure clause must also be laid out (e.g., lawyers, spouses, etc.).

Non-Disparagement – A non-disparagement clause restricts what you can or cannot say about the company, its employment practices, and reasons for the termination, and it prevents you from taking any action that negatively impacts its reputation, products, services, management or employees. Read this very carefully to ensure it is not too broad and be certain you can comply with it before you sign it.

Other Clauses – Other clauses in the agreement may include: references, post-employment cooperation, the return of company property, and/or a no re-hire policy.

Signing an Employment Separation Agreement

The company will prepare an agreement to cover its interests first; therefore, it’s in your best interest to carefully review each of the terms of the proposed agreement and evaluate it in light of state and federal employment laws applicable to your situation. Consider the following to ensure that the agreement you are signing adequately protects your rights:

  • Do you have any claims that you will prevented from pursuing once you sign the agreement? This is the seminal question which requires a careful evaluation of facts.
  • Why were you terminated?  A viable claim of Wrongful termination, for example, may be cause for taking a different approach.
  • Your age. If you are over 40, you have 21 days to make a decision before the separation agreement expires, and you also have an additional 7 days revoke the agreement after you sign.
  • Is the agreement a general release? Does it cover all present and future actions, such as class action lawsuits, or is it limited to employment up to your termination?
  • Does it contain restrictive agreements such as a non-compete agreement, a non-solicitation agreement or an agreement of confidentiality that is so broad that it would affect your ability to become reemployed?

A properly drafted separation agreement and release will protect the interests of both parties. If you do not understand all of the terms of the agreement offered to you, seek advice from an experienced employment lawyer before signing and giving up any rights. The lawyers at Faulkner Law Offices, PLLC have decades of experience in drafting and reviewing hundreds of employment agreements and separation packages.