What is an Employment Separation Agreement?
Separation agreements are legal documents that formally end the employment relationship between an employee and an employer. A separation agreement typically outlines the specific terms of the employee’s departure from the company, including any compensation, benefits or legal releases provided to the employee in exchange for relinquishing certain rights.
In general, employee-employer relationships are presumed to be indefinite, meaning there is no fixed duration. However , separation agreements can change the terms of a previously indefinite relationship to a specific term of employment, or to an indefinite term with mutual conditions. When entered into by both an employer and employee, a separation agreement creates a binding contract between the parties. The parties’ obligations under the contract will continue only as long as the contract remains active. If the contract is not valid, or is voidable and not exercised, it will last only as long as the parties’ intended relationship lasts, unless an exception applies.
Anatomy of a Job Separation Agreement
While specific details will vary from employer to employer and case to case, there are several components that should be included in the agreement, whether it is required in a contract or offered as a matter of practice:
- Severance. Most separation agreements will include some form of severance pay. In some cases, such as those of job layoffs, severance payments may be required by law.
- Confidentiality. It is common for separation agreements to include a confidentiality clause that protects the business and its activities. This is generally a broad clause that does not prohibit disclosure of information covered by applicable freedom of information laws.
- Non-Compete. Non-compete agreements prohibit the former employee from poaching clients or working for a competing business for a certain amount of time. Non-compete clauses may or may not be enforceable under your state’s law, but your business may still require this type of term.
- Non-Disparagement. Some agreements include language about not disparaging the company, its current and former employees, or even its customers.
- Mutually Accepted Release of Claims. In addition to the individual employee, separation agreements often include a mutual release of potential claims brought by the business against the employee.
Why Employers Provide Separation Agreements
Employers may choose to offer separation agreements for a variety of reasons that benefit both the company and the employee. For many employers, a separation agreement is a means of helping an employee exit the company on positive terms, while providing the employer with fundamental protections that can lead to a more solid working environment. A key interest for employers is protection of confidential information such as client lists, product pricing and costs, and trade secrets. Often, employers will recruit top talent from competitors, and to the degree that the employee has had access to sensitive information, the competitive edge may be lost if the employee is allowed to transition easily to a competitor. Employers also frequently want to ensure that employees are protected after leaving the company. A separation agreement should require a new employer to agree that the departing employee will not disclose proprietary information to benefit the new employer, and the new employer should be trade and contract-smart enough to understand that certain information should not be revealed or discussed with the departed employee. Confidentiality requirements in separation agreements are a tool to prevent the former employee from taking advantage of any remaining advantages in their possession, and should be clearly negotiated to cover all company interests with regard to hired employees. In addition to the practical concern of employees jumping to new employment with competitors armed with sensitive information, there are overarching standards that require employers to demonstrate good faith and fair dealing in the termination process. Employers should be aware that they can be challenged on grounds of improper or dishonest reasons for termination if an employee later wants to challenge the effectiveness of the separation agreement. The net gain of a mutually acceptable written agreement is that separation terms, confidentiality, IP issues and other matters can readily be handled and agreed so that a successful separation is reached.
Employee’s Perspective: Pros and Cons
The advantage to the employee is financial. The main benefit to the employee in entering into a separation agreement is the payment of additional money. The question is whether or not the employee would receive that money in the absence of the agreement. Generally, the answer is no. Oftentimes employees, depending on their specific circumstances, will receive some amount of money whether or not they sign the agreement, but the amount of such money will vary substantially. With respect to employees whose employment is terminated with good cause, the employee may receive no severance at all. Many employees receive their last pay or more without having to sign a separation agreement, but usually they will not receive additional money beyond that amount unless they sign the agreement. The Separation Agreement therefore makes it necessary for the employee to make a choice – do I accept the money offered by the company pursuant to the terms of the separation agreement or do I refuse the money and see what the company does next? If the Separation Agreement is a good one and the employee has decided he wants to leave his employment in any event, it would appear to be an easy decision. On the other hand, if the Separation Agreement is bad, or the employee actually wants to stay, then it makes sense for him to consider his options but it would appear to be a harder decision.
Another disadvantage to signing the separation agreement is that it could impose additional obligations on the employee after his employment ends. Some separation agreements may require a non-compete agreement to be signed by the employee. A valid non-compete can prevent an employee from working in a particular occupation or location for a certain period of time. Such an agreement could prevent the employee from working in his usual job after his employment ends. Employers should not require employees to sign a non-compete agreement if the employer has terminated the employee’s employment for good cause. In most circumstances, an employee who is terminated without good cause should not have to sign a non-compete agreement as a condition of receiving severance. It would be advisable for an employee offered a separation agreement to sign it even if it has a non-compete clause, but then consult with an attorney since it is possible that the non-compete agreement could be avoided or restricted in its application to the employee’s situation. A non-compete agreement signed by an employee who is leaving over bad conditions, will not look good in court. The non-compete clause could be sleezy and become embroiled in litigation over its enforceability. One way to avoid this kind of problem is for the employer to draft a completely separate non-compete agreement and negotiate it separately from the rest of the employee’s severance package. Other provisions in a separation agreement such as confidentiality and return of property clauses, are less harmful but sometimes these clauses may not be supported legally. For example, in some instances it may be difficult for the employer to prevent the employee from disclosing accurate information about the employment, such as information contained in the personnel file, item numbers on time sheets or information not regarded as confidential. Most of the time such confidentiality provisions are not harmful, but the employer should consider whether they are factually and legally justified.
Legal Issues and Enforceability
Upon its execution, a separation agreement creates a binding contract between the employer and employee, and such agreements are generally enforced by the courts with limited exception. However, certain legal considerations may determine whether an agreement is ultimately enforceable by the Court. For example, it is clear under New York law that the existence of duress or undue influence or the presence of an unconscionable provision may preclude the enforcement of a separation agreement. See Phillips v. Freedom Mortgage Corp., 2015 NY Slip Op 32504(U) (Sup Ct, NY County, Oct. 23, 2015) (enforcing separation agreement despite allegations that it was invalid for lack of consideration because plaintiff’s bonuses and commissions were paid post-termination); Favish v. CILP Assocs., LP., 2003 WL 23319204 (S.D.N.Y., Dec. 18, 2003) (enforcing separation agreement despite plaintiff’s arguments that it was induced by duress and lacked consideration).
Whether an agreement is unconscionable is determined on a case by case basis, which turns on the elements of substantive unfairness and procedural unfairness. The first element, substantive unfairness, requires a determination as to whether the terms of an agreement are unreasonably favorable to the party against whom it is enforced. See Phillips, supra. "[T]he unconscionability doctrine does not permit the court to relieve a party from a bad bargain. . . . The function of the doctrine is . . . [t]o prevent oppression and unfair surprise, and not to disturb a party’s allocation of risks merely because the court considers it unwise." Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10, 538 N.E.2d 891, 538 N.Y.S.2d 890 (1988). Indeed, in order for an agreement to be unconscionable , it must be "very one-sided." See Phillips, supra (citing Corigliano v Classic Pastry Shop, Inc., 93 A.D.3d 856, 858 (2d Dep’t 2012)). The second element, procedural unfairness, focuses on the context surrounding the agreement’s execution, including the age and relative bargaining power of the parties, as well as the manner in which the agreement was negotiated. See Corigliano, supra.
While arguably "a strong case can be made that all severance agreements are necessarily unprocedurally unconscionable if executed in the wake of a termination of employment," Phillips, 2015 NY Slip Op 32504(U), the mere fact that a severance agreement is mutually negotiated does not preclude its enforcement as a matter of law. Rather, one must look to the specific circumstances of each individual circumstance to determine whether there was procedural unfairness in the context of an agreement’s execution (e.g., an employee’s opportunity to review the agreement, whether an employee had the benefit of counsel, etc.). See Phillips, supra; see also Yalincak v. North Shore Realty Mgmt., Inc., 62 A.D.3d 718, 719 (2d Dept.2009) ("plaintiff knowingly and voluntarily waived his right to counsel before subscribing to the severance agreement, and therefore the agreement is not unconscionable."); Kay v. PGA Tour, Inc., 2014 NY Slip Op 24675, *6 (Sup Ct, Nassau County, Dec. 1, 2014)("although the severance package was offered in the context of a sudden termination of employment, it was not procedurally unconscionable at the time of execution").
Therefore, with the right and proper assurances in place, employers should feel comfortable drafting separation agreements that are mutually beneficial while at the same time protecting the employer’s interest.
Negotiating a Good Agreement
To that end, you should ask for terms beneficial to you and you should consult with a lawyer who knows wage and hour law and other employment law issues.
In many cases, employers will grant benefits or concessions in exchange for a promise of confidentiality or waiver or release of other claims. The promises may not be legal, in which case they should not be kept by the employer, and the claims may not have occurred, so waiving them may not be a good bargain anyway. But, if you don’t ask for it or point it out, the employer may assume you will remain quiet about the arrangement, and being silent can count for much when the employer wishes to avoid taking a certain position or making certain statements without your intervention or approval. So, ask about confidentiality and other matters you believe important. Do not be afraid to ask for benefits, even if you believe them to be a long shot. Everything is subject to negotiation, even if the employer does not see it that way.
Furthermore, talk to your lawyer before even agreeing to enter negotiations. Perhaps you have enough leverage to achieve a better deal, or perhaps you should receive more than you think. Speak to a legal professional who can help you put together an argument and strategy to get the best deal for yourself. Attorneys often have experience negotiating settlements, so they know what works and what doesn’t.
Common Pitfalls
One of the most common mistakes some employers make is using ambiguous wording in their separation agreements. A vague or unclear term can invite false expectations on the part of the terminated employee or lead to litigation if the employee later challenges a summary dismissal. Another common mistake is failing to include language in the agreement which ensures its enforceability. For example, over the past few years we have seen a number of judges refer to a provision called a "bosses’ clause." It is helpful for employers to include a "bosses’ clause" in their separation agreement as a term which says the terminated employee waives all rights to challenge the termination except for what is in the agreement itself and any other remedies he or she may have under the Workplace Safety and Insurance Act.
A common mistake that employees make is signing a separation agreement without first having good , independent legal advice. Often the separation agreement offered by the employer includes a full release of claims against the company, a waiver of the employee’s common law notice, a confidentiality provision, a return of company property provision, a reference provision, and several other terms. It is important for the employee to understand all of the likely consequences and risks before signing an agreement.