Separation Agreements: Going Separate Ways with a Written Handshake

Most managers dread the thought of terminating an employee. When the decision is made that a company and an employee must go separate ways, then a Separation Agreement is advisable. It acts as a "written handshake" between the two parties, and can prevent misunderstandings down the line.

Is a Separation Agreement required?

No. The typical scenario for a Separation Agreement involves an involuntary termination where the company is willing to pay some form of severance compensation to the employee. In these cases, a Separation Agreement is recommended but not required.

Is severance pay required?

U.S. law only requires pay through the last day of work, as well as pay for any accrued vacation. However, further commitments by the company to provide severance pay may be found in a company severance policy or in an individual employee's employment contract. In these limited cases, the severance pay must be paid. In other cases, severance payments are optional.

What are the standard provisions of a Separation Agreement?

There will be some standard legal verbiage and some key provisions in almost every Separation Agreement. It is important for the Agreement to review the identity of the involved parties, the fact of the termination, the terms of any severance, the release of claims, the right of the employee to consult an attorney, confidentiality requirements regarding the terms, and some boilerplate language about the applicable law and enforceability of the agreement. The two key provisions are the severance pay, if any, and the release of claims.

The terms of severance would include the amount (if any), the timing for the payment, and a statement that applicable tax withholding will be deducted. If certain benefits are being given in addition to or in lieu of a cash severance payment, the terms and conditions of these benefits need to be specified in the Separation Agreement.

The release of claims is the most lengthy and legalistic-sounding part of a Separation Agreement. For example, in the State of California, the provision must include a reference to Section 1542 of the California Civil Code and a reference to a specific waiver of the protections of Section 1542. The purpose is to plug as many ambiguities as possible that might otherwise undermine the enforceability of the release.

There is a close connection between the severance and release provisions of a standard Separation Agreement. In fact, in order for a release of claims to be binding on the employee, the employee must receive some severance payment or other benefit in addition to the employee's accrued vacation, COBRA coverage and any other legal rights. In exchange for any severance given above and beyond these rights, the company has a right to expect that it won't be sued later.

Does the age of the employee make a difference?

Yes, special requirements apply to terminated employees who are age 40 or older. In order for a release to be valid, employees age 40 and over must be allowed 21 days to decide before an offer can expire, and must be allowed an additional 7 days after signing to revoke the Separation Agreement. An employee in this age category may voluntarily sign earlier than the full 21 days, in which case the 7-day revocation period will begin on that earlier date of signing.

Are there additional provisions to consider?

Yes, Separation Agreements can be customized based on the circumstances of each situation. Here are some of the questions to consider:

  • Is the termination part of a workforce reduction?
  • Is there a concern about the employee making disparaging remarks about the company?
  • Will the employee want the company to give a standardized response when a reference check comes in?
  • Is there company information or equipment the employee needs to return?
  • Do invention and intellectual property rights of the company need to be established or reiterated to the employee?
  • Are there some stock option vesting questions to be addressed?

If the answer is "yes" to any of these questions, corresponding provisions should be added to the Separation Agreement.

Clarifying the Next Steps

The "written handshake" helps to ease the pain of both the terminated employee and the employer. Clarifying crucial next steps as the company and the employee go separate ways is important - get it in writing to prevent misunderstandings.