Take 5: Considerations for a Separation Agreement

Normally in this blog, we like to discuss the positive aspects of starting a growing a business.  However, as a business owner, founder or manager, you are sometimes required to make difficult decisions. One of the most difficult is terminating an employee. Perhaps you’ve realized the employee isn’t a good fit or doesn’t have the skills required for the position.  For whatever reason, change is required. While this is a difficult time for everyone, especially the employee, there are proactive steps that can be taken to minimize disruption to your business, while also providing closure with the employee.  One important step is getting a release and separation agreement in place.  This is an agreement between the company and the employee where the employee agrees to release all potential claims against the company in exchange for some type of consideration, usually a separation payment. Below are a few factors to consider when putting together a release and separation agreement.

1.               Separation Payment.

A separation payment, sometimes known as severance pay, is a financial compensation provided to an employee upon termination of employment. amount of the separation payment can vary depending on factors such as the length of employment, the reason for termination, and the employee's role within the organization. It is normally provided in exchange for a release of all potential claims. It can also help ease the financial burden of the departing employee.

2.               Release of All Claims.

The key component to any separation agreement having the employee agree to waive any and all claims against the employer arising from their employment or termination. By entering into the separation agreement, the employee acknowledges that they have received all compensation owed to them and agrees not to pursue legal action against the employer. This clause is essential for protecting you from future litigation and ensuring finality in the termination process.

3.               Confidentiality Clause.

A confidentiality clause in a separation agreement should always be included and it generally addresses two things. First, it confirms that the employee’s confidentiality obligations from any previous confidentiality agreement the employee entered into remain in place after termination. Or, it imposes confidentiality obligations on the departing employee if a previous agreement did not exist. Generally, this confidentiality obligation includes a duty not to disclose sensitive and proprietary information and trade secrets.  Confidential information should be defined in the separation agreement if it was not defined in a previous agreement. Second, it is normal to include a confidentiality clause that prohibits the employee from discussing the terms of the separation agreement, including the amount of any separation payment.

4.               Non-Disparagement Clause.

Maintaining a positive reputation is crucial for businesses, and a departing employee's actions can significantly impact a company's image. To prevent the dissemination of negative or damaging statements, separation agreements often include a non-disparagement clause. This clause prohibits both the employer and the departing employee from making disparaging remarks or statements about each other, whether orally, in writing, or on social media platforms. By agreeing to this clause, both parties commit to maintaining a professional and respectful demeanor, even after the termination of employment.

5.               Statutory Considerations.

To ensure that separation agreements are entered into voluntarily and without coercion, certain statutory requirements may apply. Certain jurisdictions mandate a minimum amount of time for the employee to review and sign the agreement. Additionally, employees may be granted a right to revoke the agreement within a specified period after signing. This allows employees time to carefully consider the terms of the agreement and seek legal counsel if needed. Finally, if you offer any benefits to the departing employee, you may have a statutory duty to provide information about how those benefits could be continued for a certain amount of time. The most common example of this is the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) which allows departing employees the right to continue group health benefits for a certain amount of time.

 This article is meant only as a brief introduction of certain factors to consider if you want to put together a separation agreement. If you have specific questions about a separation agreements, or would like assistance drafting a release and separation agreement, we’d love to connect!

LetsGo@cruxterra.com