The Appropriate Use of Separation Agreements to Limit Employer Liability

When preparing to involuntarily terminate an employee, employers should consider the risk factors that may dictate the use of a separation agreement. For example:

Is the employee in a protected class (age, race, religion, color, sex, national origin, mental or physical disability, veteran status)?

Has the employee recently engaged in protective activity (such as taking FMLA leave or filing a workers’ compensation claim)?

Is there an arguable employment contract that must be considered?

Is the employee litigious?

When one or more of such risk factors are present, a separation agreement that includes a full release of claims may buy peace of mind, address questions such as return of property, confidentiality, non-disclosure and non-compete obligations, and avoid litigation. However, if the nature of employee’s misdeeds are egregious and documented (such as stealing, workplace violence or harassment), a separation agreement should not normally be offered, as it may establish a precedent that bad behavior will be “paid off” and morale will suffer.

The essential elements of a separation agreement are as follows:

1. There must be a knowing and voluntary signing of the agreement without intimidation and with sufficient time for employee to consider whether to sign and an opportunity to seek counsel.

2. Adequate consideration must be offered. This may consist of money that employee is not legally entitled to receive, an agreement not to oppose employee’s claim for unemployment benefits, payment of COBRA premiums for a defined period of time, etc. If your employee handbook provides that accrued but unused vacation or paid time off will not normally be paid in the event of termination, such amount may be used here.

3. Specific description of released claims, including all claims related in any way to transactions and occurrences between employer and employee to date that arise out of employee’s employment and the end of that employment. Include release of claims for breach of contract, wrongful termination, violations of state and federal laws (specify), infliction of emotional distress. Note that release does not encompass claims for unemployment insurance benefits or claims under workers’ compensation laws except claims for wrongful termination, discrimination or retaliation under those laws.

There are special requirements for release of claims by employees over age 40 under the Age Discrimination in Employment Act (ADEA). The separation agreement must specifically release ADEA claims. Employee must be given at least 21 days to consider the release and 7 days to revoke acceptance.