Understanding Employee Separation Agreements

When it’s time for employers and employees to part ways, an employee separation agreement can help protect both parties. Although they’re not as common as they should be, employee separation agreements can reduce the likelihood of wrongful termination suits, clarify any post-employment expectations and resolve any lingering issues.

This quick guide will help you understand why you need an employee separation agreement and what they should include.

What Is an Employee Separation Agreement?

Most American employment is considered at-will employment: the employer or employee can terminate the relationship at any time and for any reason. Exceptions include discrimination on the basis of race, religion, sex, national origin, age, disability, citizenship, pregnancy and other protected classes, or being fired as an act of workplace retaliation.

Employers can’t force employees to sign a separation agreement. However, if they are amenable to doing so, the agreement protects the company from legal action as a result of termination.

Because contracts require consideration (a benefit) for both parties, employers need to provide incentives for the employee to sign. This could include severance packages, benefits or other financial compensation.

Separation agreements are useful for protecting employers from lawsuits—but they’re also a way to protect the company’s public image. Even if an employee’s wrongful termination suit is dismissed or they lose, the company may still receive plenty of negative publicity. Paying a generous severance package is usually much less expensive than litigation or bad publicity.

What Does an Employment Separation Agreement Cover?

Here are some employment separation agreement best practices—include these items to cover all your bases:

• Termination details: This section should name the employer, employee and final date of employment. Depending on the individual circumstances, you may also wish to give a reason for termination, whether it’s a layoff, resignation or termination.
• Waiver of legal claims: Next, your agreement should include a waiver of any legal claims against the company, as a result of their termination. This needs to be worded very carefully, since a poorly worded agreement could leave the company open to certain types of litigation.
• Severance or general fee: This is the consideration in exchange for not bringing a lawsuit against the company. The company might offer certain benefits, a severance package or a general fee. (General fees are not as common, but may be included.) Typically, severance is optional—no company is required to offer their employees anything more than unpaid wages and vacation time at the time of firing. However, contracts require consideration to be enforceable. If the employer is the only party receiving a benefit, the contract will likely be unenforceable.
• Non-compete clause: If your employee did not already sign a non-compete agreement at the outset of their employment, your employment separation agreement can include one.
• Confidentiality clause: Similarly, you may want to include a confidentiality clause if your employee is not already under a non-disclosure agreement.
• Non-disparagement clause: You may wish to add a non-disparagement clause. This type of clause prevents the former employee from publicly disparaging the company.
• Age discrimination reference: If your employee is over age 40, they are protected by the Older Workers Benefit Protection Act (OWBPA), which is part of the Age Discrimination in Employment Act (ADEA). Note that older workers have 21 days to consider the offer. After signing, they have 7 days to revoke their signature.

Again, the employee has the right to decline the separation agreement and any benefits offered. They may also try to negotiate the terms of the contract.

What Are the Four Kinds of Employee Separation?

There are four popular types of employer/employee separation:

1. Dismissal: This is firing as a punitive measure, whether the employee was not performing up to standards, engaged in misconduct, or other lawful reason.
2. Resignation: Resignations occur when an employee quits of their own accord. It can be voluntary (the employee chooses to quit) or involuntary (the employer gives them the option to quit or face disciplinary action).
3. Layoff: Layoffs occur due to forces outside the employer’s control, such as seasonal fluctuations, loss of equipment or workspace, shortage of raw materials, and more.
4. Retrenchment: Retrenchment is when a company terminates employees due to economic reasons, such as low demand for products, surplus staff, or economic slowdown.

So, what is the difference between employment separation and resignation? Employment separation is a general term to cover all the ways employment can end, including retirement. Resignation is when an employee quits, whether to avoid discipline or for another reason.

SixFifty has solutions

With SixFifty’s Employment Agreements toolset, you can easily draft employment separation agreements. The only task left for your in-house or outside counsel is to review and approve. If you’re ready to get started or have further questions, schedule a demo with SixFifty today.