The Separation Agreement Defined
A Separation Agreement is a wage and general release, so it means the same thing. In California, the beginning of an employment relationship is signified by the employee signing the offer letter and the end of the employment relationship is by the employee signing the separation agreement which memorializes all of the severance payments the employee is receiving. This normally includes some amount of severance pay, a severance payment that the employee/employee-companion can take credit for against what they (or she) believes is owed. For example, if the severance payment is $10,000, and the employee was wrongfully terminated by non-payment of wages , the employee believes he is owed $5,000 in back pay at the time of the separation agreement. The employee would sign the agreement, and acknowledge that the employer will send out a check in the amount of $5,000. So when the money comes a week or two later, the employee is satisfied. The danger here is of course, whether the employee really is owed the money. Up until this point, the employee hasn’t had a chance to go through the discovery process, and may not do so depending on how much the case is worth. At this point, however, the employee has no recourse. The employee normally agrees to not take any further action against the employer.
Essentials of a Separation Agreement
The key components of a separation agreement vary based on the circumstances of each agreement. Typically, a separation agreement will contain information about the payment terms, including amounts and timing, of any separation payment. The separation agreement will likely include a list of covenants that the severing employee must comply with, such as a non-disparagement clause, a confidentiality provision, and the scope of the general release of claims. The parties may include additional terms, such as a reference letter, the return of company property, the designation of ongoing counsel to answer future questions, and/or a provision spelling out when work for the employer is deemed to have actually ended.
California Requirements for Separation Agreements
Legal requirements in California can vary, and a qualified HR professional or attorney in California will be necessary to determine the forms of separation agreements that do or do not comply with the laws or regulations of the state.
There are certain requirements that are mandatory in California for all employment contracts, including separation agreements. First, under California law, the employee must sign the agreement voluntarily. That means that an employer cannot force an employee to sign a separation agreement. In California, the employee must sign the separation agreement free from coercion and duress. Prior to signing the agreement, the employee must be given enough time to review the terms of the agreement. It is also recommended that the employee is given time to consult with his own legal counsel regarding the terms, even though it is not required by law. Also, if the agreement is one that affects the rights of employees to complain of unlawful acts by the employer, the employee must not sign the agreement prior to the date of the termination of employment (with some exceptions).
Any separation agreement that makes reference or deals with the release of any age discrimination claims must meet the additional requirements of the Older Workers Benefit Protection Act of 1990. Employers should pay particular attention to the technical requirements that these provisions supersede regular contract law.
Apart from the mandatory requirements of state and federal laws, there are some common legal pitfalls under California state law that are present in many forms of separation agreements. One such pitfall that has been found in a number of separation agreements is the list of individuals who are included in the agreement. For example, if the total list of individuals is up to 20 to 25 people, then the list of those included in the agreement may have to be distributed individually. The inclusion of the home addresses in the agreement has turned out to be a pitfall that many employers have run into over the years. Some employers think that by including these addresses of the employees in the agreement, they can later find out where the former employees have gone or how to contact them. However, many employees that are listed in the separation agreement may not want their personal mailing address disclosed to their former employer. Employers should remember what the exact purpose of the separation agreement is and why any of the information contained in the agreement is relevant to the subject of the agreement.
The Pros and Cons for Employers and Employees
There are both benefits and potentially negative consequences of employment separation agreements that employers and employees should carefully consider.
For the employer, one benefit is the ability to release an employee from all claims arising out of the employment term. This gives employers peace of mind that even after the exits of certain employees, they will not be sued in the future due to employee’s former conduct even after the employee has left the company. This is particularly important for employment practices claims, as the costs to defend a lawsuit of this nature can be extremely high and can be devastating even if an employer manages to win.
Separation agreements can also allow an employer to satisfy an employee’s unemployment claim to the California Employment Commission in exchange of the employee’s signing of a separation agreement. As stated previously, employers are discouraged from entering into "no rehire" clauses with the employee . However, if there are no such provisions in the agreement and the employee voluntarily quits or is terminated for cause, the unemployment claim can be effectively settled by payment and entry of the separation agreement. In the alternative, if the employee is laid off, the unemployment claim can be effectively "settled" by payment of severance compensation. Note that this latter option will be very much dependent on the circumstances surrounding the layoff itself.
For the employee the primary benefits of separation agreements are: (1) allowing for a voluntary exit plan without the potential of additional legal actions in the future; (2) setting a limit of liability on any potential claims the employee may have; (3) providing more information than provided by the employer upon termination. The primary drawbacks to the employee are: having to pay his or her own legal expenses, unless the employer agrees to pay a portion of the attorney’s fees; waiving legal claims they may have against the employer; and the possible negative impact of having actually to defend oneself in court if one does not accept the proposed separation agreement.
Negotiating a Fair and Reasonable Separation Agreement
When negotiating the terms of a separation agreement, both parties should be well-informed and prepared to be flexible. For employers, it is important to ensure that the separation agreement is comprehensive enough to protect the company’s interests but also reasonable enough that the employee will be willing to sign it. For employees, it is essential to thoroughly review the separation agreement with legal counsel to fully understand the implications of each term and to negotiate any points of contention.
One tactic for effective negotiation is to establish a set of priorities for which terms are non-negotiable and which terms are flexible. This allows both the employer and employee to identify areas where they are willing to compromise and areas where they are not. Additionally, it is important to consider the long-term effects of the separation agreement. For example, waiving the right to bring future employment-related claims in exchange for a larger severance package may be a fair exchange depending on the circumstances. However, if the employee is a high-level executive or has unique skills and talents that could easily be exploited by a competitor, they may want to limit the scope of the release.
Similarly, covenant not to compete terms should be open to negotiation. The enforceability of a covenant not to compete in California is very limited, and any attempt to broadly restrict competition may be challenged. However, in some circumstances a narrower restrictive covenant may be necessary to protect the employer’s legitimate business interests, and should be negotiated with that in mind.
It may also be beneficial to arrive at a compromise based on leveraging terms that might otherwise be challenges. For example, if there are both periodic payments and a single lump sum in a separation agreement, agreeing to forgo the lump sum payment in exchange for a higher periodic payment amount may make both parties more willing to sign.
Finally, it is important that this negotiation takes place before signing the employment separation agreement to prevent either party from feeling coerced. It may be tempting for an employer to push an employee into signing the separation agreement quickly to prevent them from speaking out or moving quickly to obtain new employment, but this could lead to significant liability.
Good faith negotiations often lead to a separation agreement that satisfies both parties and protects their interests, allowing the employer to move forward to pursue a qualified replacement for the employee and the employee to attain appropriate compensation while simultaneously moving into the next chapter of their career.
When to Involve an Attorney
When offered a separation agreement, most of our clients tend to believe that they need to accept the offer immediately or could lose the opportunity altogether. This is not the case. Although there are generally time limitations set forth in these agreements on when they must be executed and returned, once your employer makes the offer they cannot revoke the deal at a whim. The terms are set. Before proceeding it is important to understand your legal rights and obligations. In California, the law has specific requirements for what needs to go into the separation agreement in order for it to be a valid agreement. The law also requires that if the offered a severance package the employee be given a reasonable amount of time to review the agreement. Approximately 21 days is considered reasonable however it is recommended that you wait 45 days before signing . Likewise, the employer is required to keep the offer open for at least two weeks. It is also important that the language used in the Agreement is clear and unambiguous to avoid later claims that the employee did not understand or accept what they were signing, which is a common claim in these cases. When this happens, the employer often agrees to re-negotiate sometime down the line. There is no reason not to have a clear separation agreement from the start. Another important reason to seek the assistance of a qualified attorney is to help explain some of the deductions that are often taken out of the initial severance payments or the final pay check. These deductions take the employees by surprise and detract from what a person thought they were receiving when they signed the deal. A good personal injury attorney can help you understand which of those deductions are legitimate and help you negotiate the employer to your advantage.