5 Reasons Why an Attorney Should Review Your Separation Agreement

This Is Why You Shouldn’t Take the Money and Run

You’ve just been told you’re being terminated. Your employer hands you a ten-page agreement and tells you that they’ll give you $24,000 – eight weeks of salary – if you sign it. What do you do?

It can be tempting to take the money and run – i.e., sign the agreement on the spot. You’re surprised and hurt by the termination, and you need the money. However, as tempting as it may be, do not sign before first seeking legal advice.

What Is Meant by a Separation Agreement? 

An employment separation agreement is a legally binding contract executed between an employer and an employee upon the employee’s termination. This agreement requires the employee to waive almost all potential legal claims against the employer or company. In exchange for this waiver, the employee receives severance pay as outlined in the agreement.

In addition to the aforementioned waiver and severance pay, separation agreements may also include post-termination restrictions on the employee’s activities.

The purpose of offering a separation agreement to an employee is to obtain their voluntary relinquishment of certain rights and benefits in exchange for the receipt of a severance package. The following is a non-exhaustive list of benefits typically associated with a severance package:

• Lump sum payments
• Continued payment of salary for a period
• Vesting of stock options or other equity
• Compensation for unused sick leave or vacation days
• Paid job training or counseling
• Continued health insurance coverage.

Here are just five (of the many) reasons why you should not sign a severance offer without consulting a lawyer:

1. One-Sided Non-Disparagement Clauses 

In a separation agreement, you will likely agree not to make any statements about the employer that could be considered disparaging. You need to know what you can and cannot say because these provisions can have teeth – the employer could try to claw back the severance you’ve made if they think you violated it.

Additionally, the clause may not put any limits on what the employer can say about you. That means you want, at a minimum, a non-disparagement clause that goes both ways. And in some situations, you may be able to negotiate an agreed-upon message about your termination.

Example: Although Mark had received positive feedback from colleagues and senior personnel about his work during his time at the company, he had a difficult relationship with his direct supervisor, who constantly criticized and maligned his work. When Mark was let go, his attorney negotiated a mutual non-disparagement clause that applied to specific individuals at his former employer, including his former supervisor.

2. Overly Broad Non-Competes  

Your separation agreement may contain a non-compete – one that’s so broadly worded that it would prevent you from continuing to work in your field anywhere in the United States. And that non-compete may be hidden; it may have been in an earlier agreement that you signed, which still survives your signing of the separation agreement. Whether a non-compete and any other restrictive covenants like non-solicits are enforceable varies wildly by state and is changing almost monthly. An attorney can advise on that and can propose narrowing language.

Example: Shayla, who had a non-compete in her employment agreement, was terminated by her large employer in the health insurance sector. Her separation agreement provided that her non-compete, which she had signed as part of her employment agreement four years ago, remained in effect. The language of the non-compete barred her from working for any company that engaged “in any portion of any business” in which her former employer was engaged. Given the breadth of her employer’s interests, the non-compete effectively prohibited Shayla from continuing to work in health insurance or healthcare, even if her new employer did not compete with her old employer or if her new job had nothing to do with her old responsibilities. Shayla’s attorney negotiated an agreement with the former employer to limit the non-compete clause to only applying to actual competitors of her former employer.

3. Transition Agreements 

Sometimes, you find out you’re losing your job, but your employer wants to keep you on for a few weeks or months to help transition matters. This can be beneficial, giving you an additional salary and time to begin your search for a new job. However, the terms of your employment during this period are important. What is the length of this period? Can the company shorten it for any reason? Can the company change your job responsibilities during this time? An attorney will identify any issues here and address them as needed.

Example: Richard, a senior director at a small investment advisory firm, learned in September that the firm would close by December 31. The separation agreement presented to Richard provided that he would work at the firm until December 31 to assist with an orderly wind-down. However, it also stated that the firm could terminate him at any point during this period for “cause” – an undefined term in the agreement. Richard’s counsel negotiated a definition of “cause” for the agreement which protected Richard from an early termination except in extraordinary circumstances.

4. Cooperation Clauses 

Even if your termination is effective immediately, your employer will likely want you to be available in the future should the need arise. What that “cooperation” could look like varies by situation – it could be a 5-minute phone call to explain a process, or it could be sitting for a full-day deposition in connection with a litigation. An attorney can discuss which scenario(s) are most likely and propose reasonable limits to protect you in the future.

Example: Jean, who worked in investor relations, was leaving her employment at a hedge fund firm. The firm wanted to ensure a smooth transition with investors and asked Jean to be available for calls after her departure to provide a 5-minute introduction of her replacement to investors. This was a problem: Jean had already lined up new employment, and her new company did not want her speaking to any investors on behalf of her old firm. Jean’s attorney explained to the firm that it wasn’t in anyone’s interest for Jean to speak to investors, no matter how briefly, when she was no longer an employee of the firm. To help with the transition, her attorney crafted departure messaging with the former employer.

5. Dispute Resolution 

The last thing you want to think about when you’re dealing with termination is what happens if you end up in a dispute with your former employer over obligations in the separation agreement. 99.9% of the time, everything goes smoothly – but if you are the 0.01%, you should at least know what that dispute would look like. Small changes to a dispute resolution clause can also make it more favorable for you – or at least not nearly as one-sided in favor of your former employer.

Example: Will was offered a separation agreement that provided for a severance of $50,000. The dispute resolution clause in the agreement provided for arbitration before a panel of three retired judges; the party who filed the arbitration was required to pay 100% of the fees, including the arbitrators’ fees, unless and until that party prevailed in the arbitration. This meant that, if the company failed to pay Will’s severance, it would cost Will hundreds of thousands of dollars in arbitration fees alone to pursue a severance payment worth far less than those fees. Will’s attorney revised the arbitration clause to provide for an expedited arbitration procedure with a single arbitrator and the fees to be evenly split between Will and his former employer.

Final Thoughts 

A separation agreement is more than just a document outlining your severance pay; it is a legally binding contract that can significantly impact your future professional prospects and personal rights. While the immediate financial gain may seem appealing, it’s crucial to understand the long-term implications of signing such an agreement. This is where legal counsel becomes indispensable.

An attorney’s expertise will assist you in navigating complex provisions, including one-sided disparagement, overly broad non-competes, transition agreements, cooperation clauses, and dispute resolution terms. They can provide valuable insights into your rights, potential pitfalls, and negotiation points that could result in a better outcome.

Do not let the pressure of the situation rush you into making a decision you may regret later. After all, your career trajectory and personal reputation are at stake. If you need guidance from an experienced attorney to assist you in navigating your severance agreement, please reach out to our legal team.

FAQs 

What is a separation agreement? 

A separation agreement is a legal contract between an employer and an employee at termination. It outlines the terms of the employee’s departure, including severance pay, non-compete clauses, and other conditions. It’s essential to consult a lawyer before signing to understand its implications for your future employment and legal rights.

What is the difference between a severance agreement and a separation agreement? 

The terms “separation agreement” and “severance agreement” are frequently used synonymously. They constitute a legally binding agreement between an employer and an employee leaving the company. Within the framework of a separation (or severance) agreement, the employee waives any potential legal recourse against the employer and also consents to additional stipulations. In exchange, the employee is entitled to a severance package including, e.g., severance pay, the continuation of medical benefits, and other forms of remuneration.

Does a separation agreement have to be filed in court? 

In the United States, an employment separation agreement is a contract between an employer and employee detailing termination terms and does not need to be filed in court. It’s enforceable like any contract, given legal validity and mutual agreement. However, state-specific regulations and potential NLRB violations regarding provisions like non-disparagement and confidentiality may affect its content. Disputes can lead to judicial review.

Are employment separation agreements negotiable? 

Like any contract, employment separation agreements that set out an employee’s terms of departure are negotiable. Terms to negotiate can include financial compensation, insurance benefits, job search assistance, and more. Understanding the agreement, identifying negotiation points, considering the employer’s perspective, and seeking legal advice are crucial.

 

About the author

Mari Bonthuis is a litigation partner at Sterlington, leading the firm’s dispute-resolution practice. She is a highly skilled litigator who has tried numerous cases in federal and state courts as well as before arbitrators. Mari’s expertise encompasses a wide range of complex legal matters, including employment agreements, partnership disputes, separation disputes including those with non-compete clauses, commercial and financial arrangements, insurance coverage, and securities litigation.