An employee separation agreement is a contract between a former employee and an employer. It specifies the terms agreed to related to the termination of employment. The contract specifies the severance package of pay and benefits and the payment conditions. Employee separation agreements are legal documents, and getting them right is vital if you want to avoid litigation. This post should not be considered legal advice.
Why Use an Employee Separation Agreement?
Some employers provide severance pay but do not condition payment upon signing an agreement. When an employer uses a legally enforceable employee separation agreement, they “get something in return” for the severance pay that they provide. The employee releases claims against the employer in exchange for severance pay, significantly reducing litigation risk and giving you peace of mind.
Employee separation agreements can also reiterate existing agreements about trade secrets, non-competition, and protection of confidential information. An agreement creates a clear written document of the terms between the departing employee and employer. Please note that some states like California have laws that limit confidentiality and non-competition agreements. Consult your legal professional before drafting an agreement.
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When to Use an Employee Separation Agreement?
Employee separation agreements make useful tools in preventing litigation, primarily in layoffs and where multiple former employees may be involved. Some companies have policies that state that they will provide severance in the event of layoffs or position elimination. Such policies must say that employees have to sign an agreement to receive severance pay. Otherwise, you must provide additional severance.
These agreements can be beneficial with difficult terminations where you feel like the individual may file a claim. If an employee has a potential lawsuit against the organization, and the organization is poorly positioned to defend it, an employee separation agreement can reduce risk. For example, in situations where there’s poor documentation, providing severance in exchange for a release can be a worthwhile investment.
Whether or not you use an employee separation agreement in individual terminations will depend on your employee relations and risk management strategy, and the specific circumstance.
Finally, sometimes a very long-term, loyal employee is no longer needed by the organization, and paying severance may be the right thing to do.
When Not to Use an Employee Separation Agreement?
There are times when you shouldn’t use employee separation agreements and severance payments. Sometimes out of fear of litigation, an employer may offer severance to nearly all employees regardless of the reason for termination. This unnecessary drives up the overall cost of employee turnover.
Additionally, don’t offer severance to an employee fired for performance issues or misconduct when there’s little risk. For example, when there are documentation and no other legal issue related to the termination. In this case, paying severance will set a bad precedent that can contribute to the need for future agreements. This practice could also create a de facto severance policy and send the wrong message to other employees.
Finally, providing a modest severance to a low-risk departing employee can cause them to seek legal counsel when they otherwise wouldn’t have in an attempt to negotiate the terms of the agreement. If you have good documentation and disciplinary processes, you generally will not need employee separation agreements for most termination situations.
Enforceability of the Employee Separation Agreement
The employee separation agreement is a legal document. In most situations, the employer and employee negotiate the terms, possibly with the employee’s lawyer’s involvement, and they don’t ever end up in court. However, an employee may sign an agreement, later sue the employer, and argue that the waiver and release do not prohibit the suit because the waiver and release are unenforceable.
An employer cannot make an employee agree to pay back severance if they choose to pursue a claim. Employers can seek to uphold the agreement as enforceable and seek attorney’s fees in the event of a frivolous lawsuit.
While a negotiated agreement through severance payment is generally a deterrent to a former employee filing suit against a company, it’s essential to understand that things that make an agreement withstand legal scrutiny and be able to stand up in court if ever challenged. Likewise, you want to ensure that nothing you do throughout the process jeopardizes the agreement’s enforceability.
A release of claims against an employer is not valid and enforceable unless the agreement offers the employee something of value beyond what they are entitled to. A severance agreement generally includes a payment. It can also include non-monetary items such as services designed to help the individual find other employment. That’s more common in a position elimination or a reduction in force.
Employees are entitled to their final wages and any other compensation and benefits due under your policies. An employer cannot withhold the payment until an employment separation agreement is signed. It’s imperative to remember that final wage payment is entirely separate from payment as severance.
Requirements for Workers Age 40+
For a valid release of Age Discrimination in Employment Act claims, the agreement must explicitly reference the ADEA by name. An employer must give the employee 21 days from the date of the employer’s final offer to consider the terms of the agreement or 45 days in the case of a group layoff.
Employees must get the right to revoke an Age Discrimination waiver for seven days following the agreement’s execution. The seven days cannot be changed or waived by either party for any reason. In other words, an employee will have 21 days to consider whether or not they wish to sign the agreement. They must get written advice within the contract to consult with an attorney before signing the agreement. Once they’ve signed the agreement, they have seven days to change their mind and revoke their signature. An agreement cannot waive an employee’s rights regarding acts of discrimination that occur after the date of signing.
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Employee Separation Agreement: Other Legal Issues
Employee separation agreements cannot waive claims arising in the future, only those up to the agreement’s signing. Employees should be able to understand the agreement as well clearly.
If an employer uses fraud or other improper means to force an employee to sign the agreement, it’s not valid. Employees must have enough time to consider the agreement. While there aren’t specific requirements for employees under 40, the best practice is to give employees at least seven days to consider the agreement. Some employers apply the same 21-day condition to all workers. Your strategy will depend upon the individual situation. It’s something to discuss with your attorney.
Claims under the Fair Labor Standards Act or FLSA cannot be waived or settled without approval from the Department of Labor or a court. Any unsupported release of an FLSA claim that the Department of Labor or a court has not approved is not valid.
Employees may not waive their right to a state disability, workers compensation, and employment compensational claim. Depending on the scenario, an employer may even wish to add language to contest an unemployment claim.
Although an employee can waive the right to file discrimination in court, any release waives the employee’s right to file a discrimination claim with the Equal Employment Opportunity Commission or EEOC, which is void against public policy.
As such, your agreement can say you have a right to file a charge at the EEOC. However, you waive any right to compensation or other monetary relief as a result of any pursuit of the action. The likelihood of a person filing a claim when they’re not going to get anything out of it is much less. Besides, specific states may also limit the scope of an employee separation agreement.
Employee Separation agreements can be useful tools when laying off or even terminating one or more employees. Always make sure that you work with legal counsel when you draft your employee separation agreement. Follow these steps will help protect your company from litigation.