Carol Morris

HR in the Windy City

Developing Separation Agreements

 

A separation agreement when applied in a business context—and introduced in my previous HRTools.com Insight—consists of what an employer offers an employee when he or she leaves the company that he or she otherwise would not be entitled to, and usually is in the form of a monetary consideration. 

In exchange for this consideration, the employee agrees to fully release the company, any affiliated companies and possibly other entities or persons from claims that he or she might have against them, as of the date that the release is signed. 

Because there are both federal and state laws that can impact such agreements, I always recommend that employers seek legal counsel for definitive guidance about separation agreements. 

Therefore, the following points are for general guidance only and are summarized to help underscore how complicated this topic can be: 

1. State laws: Employers should be aware of state laws. Some state laws specify that when an employee is terminated for any reason, even if it’s for misconduct, that employee is entitled to any unused accrued vacation at the time of termination. So, since such laws relate to monies that an employee is entitled to, a separation agreement should not include any reference to the same.
2. Qualifications: Employers should work with an attorney who specializes in employment law in preparing separation agreements. As noted above, there are federal and state laws that affect separation agreements.
3. Employee performance issues: Employers should use caution before issuing a separation agreement to an employee with a history of performance problems, particularly one that has not been properly addressed and/or adequately documented. When an employer wants to terminate an employee based on performance, but has nothing documented, the employer can find itself in a frustrating position. For instance, what happens if the employee refuses to sign the offered separation and release agreement—particularly one who believes that he/she has not been fairly treated and further feels as though a legal case can be made against the employer? This is why it’s always best to address employee performance problems immediately. Employers should address performance issues head on, and be truthful about them, so they can minimize any backlash. In the case of an employee who has performance problems that have not been adequately addressed, an employer can give an employee options. Option A – take a written counseling which identifies the performance issues and tells the employee what he or she must do to avoid further disciplinary action up to and including termination, or Option B – accept the separation agreement and the financial consideration and be terminated from the company.
4. Rewarding poor performance: Employers should avoid presenting separation agreements to poor-performing employees. As stated above, address employee performance issues in a timely way. Sometimes, employers will offer poor-performing employees separation agreements as a way to be nice. They will give them extra money, and while this gesture may be well-intended, they are effectively rewarding poor performance. This action can also set a precedent for the future, and it’s usually a bad idea. While there can be some exceptions, it’s generally a bad idea. Employers don’t want their other employees to see this as some sort of standard business practice.
5. Unrealistic expectations or getting blind-sided by unforeseen consequences: Employers should view separation agreements with realistic expectations. Employers tend to have an expectation that once an employee signs a separation agreement, there will be no claims filed, which may not be true. For instance, there could be a wage claim, and just because an employee signed the agreement doesn’t mean that he or she has dispelled a right to file a wage claim. This can and does happen.
6. Employee guidance and best practices:  Employers should encourage employees to take time and review the separation agreement before signing it. Some employees may think they should go ahead and sign the agreement right away, on the spot, when it is given to them. Employers will want to dissuade employees from doing this. Everyone handles  notice of termination differently, and it’s better for anyone in this situation to be clear-headed. Employers especially want to avoid any situation where employees can come back later and say that they were under duress or they were upset and not in their right mind when they signed the separation agreement. Employers should recommend that employees take the separation agreement to an attorney to help them review it.
7. Separation pay: Again, when an employee signs a separation agreement, he or she is usually asked to release claims under federal and state laws. While there can be some exceptions, generally, the employee is agreeing not to sue in exchange for something that the company is offering. So, a business wants to make sure that it offers sufficient consideration in exchange for the release. A business may ask, “What is enough?” Of course, every situation is different, so this is a good question. Some businesses take into account the employee’s tenure; and then again, some others think that a few months of pay is a reasonable enticement. However, some businesses cannot afford to pay very much, and I have seen employees accept two weeks of pay in exchange for signing a separation and release agreement. 

As a final note, again, I cannot overstate how important it is that a business seeks legal counsel for definitive guidance about separation agreements.

The information contained in this document is for general, informational purposes only and is not intended to be legal advice. This information is not a substitute for the guidance of a professional and should not be relied upon in reference to any specific situation without first seeking the advice of a qualified HR professional and/or legal counsel regarding applicable federal, state or local laws. HRTools, Insperity and their respective employees make no warranties, express or implied, and make no judgments regarding the accuracy of this content and/or its applicability to a specific situation. A reference or link to another website is not an endorsement of that site or service.