The Dos and Don'ts of an Employee Separation Agreement: Expert Advice for Employers

While it’s nobody’s favorite part of running a business, employee separation agreements are necessary for every company worldwide and are crucial in termination, resignation, layoff, or reduction in force (RIF) scenarios. As an employer, understanding the dos and don’ts of these agreements is vital to navigating such situations effectively and in a way that protects you and your team. This blog post will provide information from an attorney’s perspective, guiding you through the essential parts of the most effective separation agreements. Learn when to use them, the legal obligations, recommended inclusions, the importance of carving out indemnification obligations, incentives to secure employee signatures, and the benefits of seeking professional assistance from attorneys such as JonesSpross.

Understanding Separation Agreements and their Applications

The first thing to understand is exactly what these documents are for. Separation agreements outline the terms and conditions of the separation, providing clarity and protection for both employers and employees. When used appropriately, separation agreements can facilitate a smooth transition, minimize legal risks, and protect the interests of all parties involved.

Employers can protect confidentiality, non-compete obligations, and releasing claims by tailoring these agreements to specific circumstances. Understanding how separation agreements work empowers employers to navigate employment separations effectively and foster positive outcomes for all involved, whether ensuring compliance with mandatory inclusions or incorporating voluntary provisions.

When to Use an Employee Separation Agreement

  • Termination: When terminating an employee, a separation agreement can help ease a tense situation by providing an employer with a waiver of liability for legal disputes, offering an employee certainty during an uncertain time, and clearly establishing the future obligations of all parties despite the abrupt departure.
  • Resignation: In cases where an employee decides to resign, a separation agreement can be used to clarify post-employment obligations, protect confidential information, and negotiate terms of departure that minimize impact to company operations.
  • Layoffs and RIFs: When conducting layoffs or implementing a reduction in force, separation agreements can establish a uniform and transparent process, provide employees with necessary benefits, and minimize legal claims.

Legal Obligations and Inclusions

Separation agreements must comply with legal requirements and include specific provisions. Here are some essential inclusions to consider:

  • Mandatory Inclusions: Federal and state laws mandate including specific information in separation agreements. For example, agreements should address unemployment benefits, COBRA continuation coverage, and information about the employee’s rights under the Age Discrimination in Employment Act (ADEA). An employee’s age may trigger additional inclusions.
  • Voluntary Inclusions: Apart from the mandatory provisions, employers can include additional clauses that address specific concerns. Some standard voluntary inclusions include confidentiality provisions to protect sensitive company information, non-compete clauses to restrict employees from joining competitors for a specified period, non-solicit clauses to protect client lists and human capital, releases of liability, and non-disparagement clauses to prevent negative statements about the company.

The Importance of Carving Out Indemnification Obligations (from the Employee’s Perspective)

One key feature often overlooked in separation agreements is the carve-out provision for indemnification obligations. When an employee signs an Employment Separation Agreement, it is vital to include language that explicitly carves out “indemnification obligations that arise pursuant to the Bylaws [or any other agreement that gives the employee indemnification].” By failing to carve out this provision, there is a risk that the employee may inadvertently release any indemnification claims they may have against the company. Consider consulting with legal experts such as JonesSpross to ensure that employees’ indemnification rights are preserved by properly including this carve-out provision.

Incentives to Secure Employee Signatures

To obtain an employee’s signature on a separation agreement, employers should offer some kind of consideration. Employers can offer both non-economic and economic incentives. These incentives can encourage employees to sign the agreement voluntarily and expedite the separation process. Here are some suggestions:

Non-Economic Incentives:

  • Positive References: Offer a positive reference, LinkedIn quote, or letter of recommendation to help the departing employee in their future endeavors. This can help maintain a positive relationship and enhance the employee’s career prospects.
  • Outplacement Services: Extend support in finding new employment by providing outplacement services. These services can include career coaching, resume assistance, job search resources, and networking opportunities.

Economic Incentives:

  • Severance Pay: Offer a financial package reflecting the employee’s service length, seniority, or other factors. This can provide a sense of financial security during the transition period.
  • Continuation of Benefits: Consider maintaining healthcare coverage or providing a specified period of COBRA premium assistance to ease the employee’s healthcare concerns during the separation process.
  • Stock Options and Equity: Evaluate whether it’s appropriate to accelerate vesting or extend the exercise periods for stock options or equity awards. This provides employees with an opportunity to benefit from their vested interests. Note extending the exercise period can give rise to a whole host of other unintended consequences.

Frequently Asked Questions: Components of a Severance Agreement

Read further for answers to some commonly asked questions regarding severance agreements and their components:

  • What is a severance agreement, and why is it important?
    • A severance agreement is a legally binding contract outlining employment termination terms and conditions between an employer and an employee. It is essential because it provides clarity and protection for all parties involved, minimizing the risk of future disputes.
  • What should be included in a severance agreement?
    • Severance Pay: Clearly outline the payment amount, timing, and any conditions associated with the severance payment.
    • Release of Claims: Specify the scope of claims being released by the employee. This helps minimize potential legal disputes in the future.
    • Non-Disparagement and Confidentiality: Address the employee’s obligations regarding non-disparagement of the company and protection of sensitive information even after employment ends.
    • Ongoing Obligations: Any affirmative duties either party may have, such as cooperation with potential legal disputes or management of benefits.
  • Can a severance agreement include non-compete or non-solicit clauses?
    • Depending on the state and nature of the employee, a non-compete or non-solicit clause can be included in a severance agreement if it is reasonable in scope, duration, and geographic restriction. Because this is a rapidly changing and jurisdiction-specific legal framework, it is important to consult legal experts to ensure compliance with local laws and determine such clauses’ enforceability in your jurisdiction.
  • What is the purpose of the release of claims in a severance agreement?
    • The release of claims provision in a severance agreement is designed to protect the employer from future legal actions by the employee. When any employee/ employer relationship ends, animosity can follow. Release of claim agreements typically requires that the employee agrees not to sue the employer for claims arising from their employment or its termination. Note that there are certain federal protections that an employer can never be released from (some claims of discrimination).
  • Can a severance agreement affect an employee’s eligibility for unemployment benefits?
    • Signing a severance agreement may impact an employee’s eligibility for unemployment benefits. It is important to understand your jurisdiction’s specific laws and regulations and consult with legal experts to ensure compliance.
  • Are there any additional provisions that can be included in a severance agreement?
    • Additional provisions can be included in a severance agreement depending on the circumstances. These may include provisions related to non-solicitation of clients or employees, non-disclosure of trade secrets, and cooperation in legal proceedings.
  • Do I need severance agreements for my 1099 contractors?
    • Any time you have a person leaving a Company’s payroll, regardless of how they are paid, the terms of that separation should be clearly spelled out in writing. The terminology and obligations will be different from a W-2 employee, but contractors should also receive a document clearly ending the relationship between them and the Company, spelling out the terms of separation.

It is important to note that these FAQs provide general information and are not legal advice. Specific legal advice should be sought when drafting or reviewing severance agreements to ensure compliance with applicable laws and regulations.

The Power of Employee Separation Agreements

Employee separation agreements are powerful tools for employers, enabling them to effectively manage terminations, resignations, layoffs, and RIFs. Employers can secure employee signatures on these agreements by understanding the dos and don’ts, complying with local employee protections, including clear provisions and offering appropriate incentives.

How JonesSpross Can Help

Navigating separation and severance agreements can be challenging. Our team of experienced attorneys specializes in employment law and has extensive knowledge in crafting legally sound contracts. Here’s how JonesSpross can help:

  • Comprehensive Guidance: We offer advice tailored to your specific circumstances, ensuring you understand your rights and obligations as an employer.
  • Agreement Review and Drafting: Our attorneys can review and draft separation and severance agreements, ensuring they are legally compliant and protect your interests.
  • Compliance with Laws: We stay current with the latest legal requirements, ensuring that your agreements adhere to relevant federal and state regulations.
  • Favorable Outcomes: With our assistance, you can optimize the separation process, minimize legal risks, and achieve positive outcomes that align with your organization’s goals.
Reach out today for support in creating the right employee separation agreements for your business.

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