What is an Employment Separation Agreement?
Employment separation agreements are legal contracts between an employer and employee. They are designed to outline the terms of the separation, settlement, and/or release of claims between the former employer and former employee or other party. Such agreements can include shares of the business and other compensation or benefits, and can be used for the purpose of clarifying the obligations of both parties and eliminating potential disputes in the future.
In the business realm, there is a distinction between a standard employment agreement and an employment separation agreement. The key difference is that the latter is executed when the employment relationship has already been terminated. In other words, it is a legal document designed to clarify the obligations and eliminate possible claims after the employment has ended .
Pursuant to California law, if executed under the correct circumstances, such agreements are generally enforceable. They serve to prevent unnecessary costs like litigation and/or arbitration, reduce the risks inherent in such disputes, and aid an employer in preserving confidentiality, usually. While the bottom line may see some degree of likely benefit from entering into an employment separation agreement, Part Four of this blog series will address the potential disadvantages of doing so, namely the possible waiver of your rights to bring such legal claims as age discrimination, race discrimination, or harassment claims under the Fair Employment and Housing Act (FEHA). It can also unwittingly open the door to wage and hour claims if one is not careful to exclude, by way of carve-out, any provisions or references to overtime, meal periods, rest breaks, and similar provisions.
Essential Components of Separation Agreements
The primary goal of a separation agreement is to allow an employer and employee to amicably end their relationship while ensuring that both parties are satisfied with the terms of their separation. To accomplish this, an employment separation agreement will typically include some (if not all) of the following key elements.
Severance Pay. Separation agreements often reference a preexisting severance pay plan or policy as the basis for the employer’s obligation to provide the employee with a termination payment. Severance pay plans must comply with the terms set forth in California Labor Code 201: "If an employer provides either paid vacation, whether known as ‘severance,’ ‘separation,’ or ‘similar type of pay,’ earned and vested vacation time, sick leave, or other paid time off (other than holidays and rest and recovery periods), whether based on hours worked, length of service, or otherwise, it shall be considered wages.’" (California Labor Code 204). However, if no severance pay policy or term is referenced in the agreement, an employer is under no obligation to provide severance pay or any other payment other than an employee’s earned but unpaid wages. In the case of a layoff or layoff-related separation, the amount of severance pay an employer should consider providing is generally one or two weeks of pay for each year of employment. If an employee is being terminated for performance, behavior, or attendance issues, an employer may want to consider offering more severance pay so that the employee will agree to a general release of claims, something that is typically included in these types of agreements.
Release of Claims. The "release language" in a separation agreement is often the most critical clause of the entire agreement. A release is the employee’s written and signed relinquishment of the right to sue the employer and the employer’s agent and officers (including all of its employees, officers, directors, or anyone acting within the scope of their employment). Under California law, for any release to be valid, the employee must know that she is releasing the right to sue for age discrimination under the Age Discrimination in Employment Act (ADEA) by signing a separate waiver document. The ADEA only applies to employees who are 40 or older. Employers cannot require employees to sign such agreements if they are not receiving some form of consideration, such as severance pay, in return. There are only three exceptions to this rule: 1) the release is executed as a term of a collective bargaining agreement; 2) the employee is not an age protected employee, i.e., under the age of 40; or 3) the release is not a condition of employment or is knowingly and voluntarily entered into without coercion.
The release can also include an explicit waiver of an employee’s right to bring claims under a particular statute or regulation or to that particular employer, including for wrongful termination, discrimination, unfair treatment, harassment, breach of contract, breach of implied contract, intentional and negligent infliction of emotional distress, sexual harassment, violation of California’s Labor Code and Wage Orders, and wage-hour violations.
The release of claims must be supported by "valuable consideration." For an employee 40 years or older to knowingly and voluntarily give up the right to sue for age discrimination, the employer must receive valuable consideration. Courts have held that money is valuable consideration. Therefore, unless the parties agree otherwise, the money paid for the release of claims in return for the employee’s waiver of her right to sue will likely constitute consideration.
Confidentiality. As a general rule, all employees have a duty to keep the underlying facts and circumstances surrounding their work confidential. However, employees may not be required to keep their pay confidential. California Labor Code 232 prohibits employers from prohibiting their employees from disclosing their wages—specifically, the amount of wages paid, rates, the payroll method, and classifications of employees. Accordingly, an employer may not require an employee to sign a nondisclosure provision that prevents her from discussing the amount of severance pay offered in a separation agreement. Confidentiality provisions in separation agreements should be limited to 1) information protected from disclosure under the civil code (i.e., trade secrets, financial information, etc.); 2) information the employer receives that is legally protected from the disclosure of confidential information to the public or media; 3) consent by the employer; or 4) under other circumstances where the confidentiality is warranted and the employee agrees in writing.
Non-Disparagement Agreement. It is common for separation agreements to contain a non-disparagement clause requiring the departing employee to agree not to speak badly about the employer and/or its principals, directors, officers, employees, company, products, etc. These non-disparagement provisions are particularly important where the employer remains a customer of the departing employee (such as in hospital separations of physicians) after the separation, and where a portion of the termination payment (severance) is intended for the purpose of maintaining these business contacts and company goodwill.
Non-Solicitation Agreement. Non-solicitation provisions restrict the departing employee from soliciting customers, clients, or employees away from the company. Thus, for at least the period of time specified in the separation agreement, a non-solicitation provision will prevent the employee from using her knowledge of the company’s confidential customers and clients to gain a competitive advantage for herself, another, or her new employer.
Obligatory Guidelines in California
The General Obligation
In a separation in which the employee is represented by counsel and the separation agreement includes a defined payment to the employee of at least $10,000, California Labor Code section 2870 prohibits the employer from requiring the employee to provide confidential information about "innovations or improvements" as part of the separation deal. However, if the employee does so, it will not be found to constitute a breach of the agreement. Section 2870 does not include an obligation with regard to the disclosure of general skills or no more than routine and ordinary work history or products, and California law also specifically provides that employers cannot then bring an action against the employee for a breach of the separation terms.
Grace Periods
California business law has a limitation of time period requirement for separation agreements that contain a release of any kind which does not include a waiver of any other non-wage related obligations that could be due the employee after employment. The requirement is that the employee must be able to be received the agreement over a period not less than necessary for a good faith consultation with legal counsel. The law further clarifies that an employee expressly can revoke acceptance of the agreement within seven calendar days of signing the separation agreement or waiver, if there is not included an effective waiver of benefits under the federal Older Workers Benefit Protection Act.
Fraudulent Inducements
An employee may be found to have a proper claim against an employer if during the negotiation and procurement of a separation agreement, any inducement is made to materially alter the legal obligations of the parties in an unreasonable manner in favor of the employer.
Recurrent Mistakes and Avoiding Them
When approaching a separation agreement, employers and employees alike might find themselves in some common traps that can lead to further issues down the line. For employers, one of the biggest issues is structuring the terms of the agreement in a way that exposes them to liability. For example, when drafting a mutual release, employers need to be sure to specify the claims being released, and technically-speaking, all claims. There are a number of common claims that are made by employees, whether they actually have a basis in fact or whether they are simply made for leverage in negotiation. These can include claims for breach of an employment contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, fraud, Labor Code violations, product defamation or disparagement, retaliation, promissory estoppel, unlawful taking/expropriation/conversion/defamation, and false light/invasion of privacy among others. Each of these claims should be reviewed with counsel to confirm they are not likely to be able to go forward in litigation and to agree on language of the release. Employees can also run into problems when negotiating their separation agreements. Some of the biggest mistakes employees make are simply failing to adequately review or potentially understand the terms of what they are being asked to sign. Other employees fail to understand the tax and benefit implications of the different separation benefits. Employees frequently will also assume oral representations, that may ultimately be at odds with the terms of the written separation agreement. Employees who either fail to seek out the advice of a competent attorney or simply do not fully review their separation agreements will frequently put themselves in the position of having to litigate over the terms of the contract. For both employers and employees, it is important to remember that separation agreements are contracts like any other. It is crucial to pay attention to detail and the terms used, and to get legal advice where appropriate.
The Process of Negotiating an Equitable Agreement
Strategies for Both Employers and Employees to Negotiate a Fair Employment Separation Agreement: When a Separation Agreement is an Alyeska Agreement
No one ever feels great when his or her employment comes to an end. It is an even tougher pill to swallow when the employer presents the employee with an offer; an employment separation agreement and release of claims. And the employee is not given the opportunity to consult with counsel, but is rather told that the employer is going to only provide the employment separation agreement or no offer at all. This happens all the time. For employers, the logic for doing so is sound in the view of the employer. But in most instances, it is not the least bit sound in the eyes of the employee. Thus, the parties find themselves at an impasse. And if you have litigated wage and hour cases, you know that when one side wants to settle and the other is not interested, settlement is really not an option. For most employers, they do not want to pay outrageous sums as a severance package. And most likely, the employer’s attorney has told the employer that the "going rate" is one month of pay for every year of employment, no matter what the circumstances. This "one month for one year" rule may be fine if the offer is being made to someone terminated without cause. But for an employee who has been forced to quit to get out of a hostile work environment, that "one month for one year" rule is simply not good enough because the employee has already suffered extreme emotional distress. Not only is the income from the job gone (along with all future raises and promotions), but now the employee is faced with a more difficult job search because of the gap in employment history. To poorly paraphrase the old saying, "counsel will make a deal with the devil," if the employee’s remedy in a lawsuit would be zero to six months’ pay, the employee will likely be willing to settle for a lot less than an average wage and hour plaintiff . If the employer were to try and force this kind of a settlement by offering the employee a pitiful sum with the threat of paying even less if the employee does not sign the employment separation agreement, the employee may become unreasonable and play hardball too. Hire a competent employment law attorney – do not hire an attorney who does not specialize in employment law to negotiate an employment separation agreement. Do not hire an employment law attorney who thinks that such transactions are boilerplate. And especially do not hire an employment law attorney who thinks that it is okay for the employer’s attorneys to negotiate the employment separation agreement as well as help prepare the initial draft of the employment separation agreement. There is no shortage of employment attorneys in California. There are even more than a few good ones. But there are literally only a handful of attorneys who are seasoned negotiators when it comes to drafting and closing an employment separation agreement. And if you’ve been dumped from your job, you need such an attorney. Even more than an experienced attorney, you need an attorney who is willing to negotiate against the employer, and then renegotiate against the employer, just like the hard bargain the employer uses when it negotiates against you. In such a situation, your attorney will very likely require you to list out the non-monetary provisions that you would like included in the employment separation agreement. In many cases, the employer (with full disclosure) will give you a list of those provisions already. If the employer is not reasonable, then your attorney will need to wonder why. Unless these issues are resolved, and you have considered whether you wish to risk it, you should consider not signing the employment separation agreement.
The Importance of Legal Representation
The primary purpose of an employment separation agreement is to bring closure to the employment relationship. In most cases, the employer will ask the employee to sign the agreement. While in some cases an employee may be able to maximize his or her severance package without legal counsel, once the parties are at an impasse, the involvement of legal counsel is a critical factor to consider before settling the dispute. If the employer seeks to enforce an overly broad provision, the employee may need to file a lawsuit to force the employer to comply with the law. It is even more important for an employee to seek legal counsel if forced to sue in order to exercise rights under the law. The Financial Accounting Standards Board (FASB) has come up with new ways that employers can account for their severance packages, and these complexities require the expertise of experienced counsel. Employers can attempt to circumvent the law by using a waiver or release. A waiver or release signed without understanding all aspects of its impact may not withstand judicial scrutiny. Employees should never sign a waiver or release or accept any terms or conditions set forth in an employment separation agreement without first seeking the advice of competent legal counsel.
Recent Legal Developments Concerning Employment in California
In recent years, California has seen significant changes to its employment laws, which have a direct impact on the drafting and enforcement of employment separation agreements. One such change is the adoption of new regulations regarding the confidentiality of the allegations of unlawful acts made under Settlement Agreements. (California Code of Civil Procedure Sections 1001-1002.) The addition of these new regulations has made it clear that as a general rule, provisions in employment separation agreements precluding the employee from divulging any information pertaining to a claim or case of sexual harassment, assault, or discrimination are now voidable. Those standing to enforce , can still prevent the disclosure, but only with a showing of the need to protect against disclosure, which would constitute a substantial prejudice to any party or public interest. Yet, even in the enforcement context, the burden has now shifted, and once the party affected opposes the extension, the court must weigh the negative effect of the disclosure against the public interest in encouraging the reporting of prohibited harassment. In sum, California continues to be the state most heavily regulating the content of employment separation agreements and continuing to trend toward greater restrictions on terms often found in those agreements.