Everything You Need to Know about Employment Separation Agreements
What are they?
When employers decide to terminate a job, they’ll want the employee to release the company from any binding claims. To do this, most companies use an employment separation agreement. It’s a way of saying both parties have reached an amicable end to the working relationship.
Employment separation agreements aren’t required by law; companies use them to seal confidential company information or to protect from lawsuits. After signing, an employee can’t sue employers for wrongful termination or severance pay. So the question is: should you sign an employment separation agreement?
Terms of the agreement
The separation agreement lists the conditions both parties agree to and the legalities binding the contract. The conditions will supersede other agreements, including your employment contract, so examine the terms carefully. Common conditions include:
Details of the separation - The agreement identifies both parties and states employment and termination date. It may give a specific reason for leaving -- layoff, resignation, termination -- or simply state the employee is leaving the company.
A severance package - This is optional and may or may not include a monetary payout. US law only requires that employees receive wages due to the final working day and accrued vacation. Even the biggest companies layoff staff without severance pay. Refer to your employment contract for terms governing severance packages. Remember, the company wants you to sign the agreement so you have no future claims. Consider if the severance package on offer is worth that release.
Check the employee handbook for rules and procedures covering terminations. Look, in particular, for company policy on different reasons for termination. If it’s the result of company downsizing, for instance, you could be entitled to a severance plan or additional payouts. Severance may take the form of benefits in lieu of cash.
Amount and method of delivery - If the company offers wages and other payouts, the agreement must spell out the exact amount and nature of the compensation. The payout could be a lump sum or a structured plan. In all cases, it should stipulate the date and delivery method. When companies pay severance over a fixed period, the agreement must define the duration and payment structure.
Tax and insurance - The agreement must outline tax deductions and health insurance payment policy. In certain cases, a company will continue paying into the employee’s health insurance plan. this could be if you’re in a group health insurance program, for example.
Non-compete provisions - A non-compete clause restricts you from undertaking a job in your field for a set time or in a specified location or both. This is another protective mechanism companies use to protect their interests. In other words, it prevents you from working for the competition. Make sure you understand the conditions and their implications before you sign. It will dictate the direction of future job prospects.
Confidentiality/non-disclosure - Employers may require the separation agreement conditions and details remain confidential. The agreement needs to state what exactly remains private -- trade secrets, company finances, customer lists and so on. They must also list exceptions to the non-disclosure clause (lawyers, spouses etc.)
Non-Disparagement - The company will outline what you can or cannot say about the company, its employment practices, and reasons for the termination.
Other clauses - References, post-employment cooperation, the return of company property, and re-hiring policy may appear.
Signing an employment separation agreement
Analyze the terms of a separation agreement and research labor laws in your state. The company will prepare an agreement to cover its interests first. So ensure you are signing something that protects your rights as well. Consider:
- The claims you will be giving up once you sign the agreement
- The reasons for termination. Wrongful termination, due to discrimination, for example, may warrant alternative action.
- Your age. If you’re older than 40, you have 21 days to think about the severance offer before it expires. You have an additional 7 days after signing to revoke the agreement.
- Is the agreement is a general release? Does it cover all present and future actions, such as class action lawsuits, or is it limited to employment up to your termination?
A good employment separation agreement protects both parties’ interests. Some employers draw up overly complicated agreements to confuse or intimidate the employee. If you don’t understand the terms, seek advice from a lawyer before signing and giving up any rights.
Note: Updates to this article have since been made by Laurence Bradford.