When and Why to Execute a Separation Agreement

03/05/07

An employee stole checks from her employer, filled them out to her benefit, then spent the afternoon trying to cash them at various banks. Tipped off by an alert teller, the police escorted her back to company headquarters.

The employee denied her attempted larceny and made vague threats to get back at the company legally over past incidents. The owners decided not to press charges, but they wanted to be rid of her for good. They had a lawyer draft a separation agreement that ensured she would not darken the company doorstep again.

Lawyers Call It a Release
A properly drafted separation agreement — or “release,” as lawyers like to call it — is a legally binding agreement in which an employee or former employee agrees to release any legal claims against an employer.

In return, the company promises some form of consideration. That, says attorney Brian McMillan, “is something of value over and above what an employee is already entitled.” It could be money, a promise not to contest an unemployment claim, or a few extra months’ health insurance, among other possibilities.

McMillan, a partner with Littler Mendelson, the largest employment law firm in the USA, highlights the importance of consideration: “One of the most common mistakes I see isan employer not providing additional consideration for the release, thus making it invalid.”

Separation agreements can also incorporate other provisions. You may add clauses, for example, that require confidentiality or return of company property. McMillan often adds a clause that says an employee will not seek to be rehired. “Say an employee is suing you or threatening to sue you for discrimination. You get a release, but six months later the employee wants to be rehired. If you reject the application, not only could you face another discrimination charge, but a claim of retaliation as well.” (This is because a release cannot cover acts occurring after the document is signed.)

When to Use a Separation Agreement
Separation agreements are used in the following situations, among others:

When you fire an employee who could cause trouble later, and you desire peace of mind.

When you want to get rid of an employee but have done a poor job documenting why.

When an employee has made (or threatened) a discrimination claim and the company chooses to settle before litigation and doesn’t want the case to come back to haunt it.

When you discharge an employee with an employment contract.

When the company is conducting a layoff that may hit protected groups disproportionately (those over forty, for example, or of a certain race or ethnicity).

Two Key Elements in a Release
According to McMillan, two key elements affect the enforceability of a release:

1. It must be voluntary. “You must,” he says, “give an employee ample time to consider signing the release. And you can’t coerce an employee into signing.” Some experts recommend giving employees a brief option period to revoke the agreement after signing — something that’s mandatory for the waiver of age-related claims.



2. It must be “knowing.” It must be clear that an employee understood what he or she was doing when signing the release. “Evidence for this,” says McMillan, “is the wording of the release, its clarity, and surrounding circumstances such as the amount of consideration.” And although no particular amount of consideration is necessary, he adds that it should be enough to show the employee intended it to be quid pro quo for the waiver of legal rights.

When an Agreement Can’t Help You
McMillan says a standard release of claims normally won’t help you when it comes to:

Workers’ comp claims

Certain FLSA overtime and other wage claims

Future claims (regarding events yet to occur)

In addition, the Equal Employment Opportunity Commission says a release “may not interfere with the protected right of an employee to file a charge, testify, assist, or participate in any manner in an investigation, hearing, or proceeding under” the laws it enforces.

A release still protects you, says McMillan, because even though the employee could file a charge with the EEOC, he or she can’t sue in state or federal court on the discrimination claim.

Finally, your state may have a say in whether a release is enforceable. Says McMillan, “The most common mistake I see is employers not checking particular state laws that may require certain language for a release to be valid.”

How to Rest Easier at Night
McMillan offers an easy way to make sure your separation agreements do not arouse suspicion on the part of employees or their lawyers: Make it a policy that anyone receiving your standard severance payment has to sign a release. “Doing so serves two purposes,” he says. “First, it means you don’t have to provide extra consideration. Second, it prevents the situation in which you only ask employees you think might sue you to sign a release.” Such a policy, in other words, doesn’t raise the red flags that might send an employee scurrying to a lawyer. All you need to say is that signing the release is required under the company’s severance policy.

In sum, declares McMillan, “Adopting and then following a policy of presenting employees with a well-drafted and legally compliant release can prevent costly litigation.”
You can contact Brian McMillan at askcounsel@littler.com.

Protect Yourself! G.Neil’s Separation Agreement Kit includes attorney-drafted separation agreements—including a special version for age-related claims and group layoffs — a termination tip sheet, and charts that list final pay laws by state.

Other helpful end-of-employment forms include: Separation Notice
Asset Protection System, which includes Confidentiality Agreement, Work Product Agreement, Non-Solicitation Agreement, and Return of Property Certificate.