Separation agreements Featured

8:00pm EDT June 25, 2009

It used to be that employees who decided to leave a company were given a farewell lunch and a hearty handshake on their way out the door. These days are now gone, as the termination decision merely ushers in a new phase in an ongoing relationship.

A good separation agreement sets out both parties’ obligations in a clear, easy to understand manner and is more likely to be upheld in courts, says David E. Gevertz, shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta.

Smart Business spoke with Gevertz on what comprises a good separation agreement and why separation agreements are essential in today’s business environment.

Why have separation agreements garnered so much attention of late?

As the cost and consequences of employment litigation have increased over time, employers have increasingly conditioned severance payments on the execution of agreements that release claims for harassment, discrimination, personal leave and the like. Plaintiffs’ attorneys, in turn, have increasingly raised arguments that such releases — even when signed and paid for — are unconscionable or otherwise defective, such that their clients can keep the monies provided and still sue their former employers. At the same time, governmental agencies, such as the Equal Employment Opportunity Commission, have aggressively argued that employers cannot use releases to prevent departing employees from bringing complaints to their attention for investigation.

In the absence of clear guidance from the Supreme Court on these issues, the lower courts are split on a number of these issues, creating a confusing and potentially costly patchwork of rulings concerning what claims employees can be asked to waive and under what circumstances.

Why are good separation agreements important for a company to have?

In addition to most employers’ obligations to continue health insurance via COBRA and/or pay unemployment insurance or accrued bonuses to departing employees, businesses must also consider the likelihood that a departing employee may go to work for a competitor or even reapply for employment some time in the future. In this environment, good separation agreements are essential to setting expectations for the relationship going forward — much the way an employee handbook does at the beginning of the relationship. Separation agreements provide the ideal forum for the parties to negotiate where the employee may or may not work next, how the employer will handle reference inquiries, and whether and when an employee may reapply to return to work at the company.

What are some of the dos and don’ts that go into a good separation agreement?

First and foremost, a good separation agreement sets out both parties’ obligations in a clear, easy to understand manner. The use of descriptive headings before each paragraph and initial lines at the bottom of each page are important. Where a release of age discrimination claims is being sought, federal law requires that employees be given at least 21 — and sometimes 45 — days to consider the agreement as well as seven days to revoke their waiver. Further, certain claims, including those for unpaid wages and workers’ compensation claims, are only valid if they’re presented to and signed off by a court or appropriate administrative agency. Agreements that implicitly or explicitly impede an employee from filing a charge with certain state or federal agencies are not only invalid, they may actually provoke a lawsuit by the government. Also, while it’s often desirable to impose confidentiality obligations on employees who receive money or other benefits in order to prevent an air of expectation about such payments, it’s critical to avoid imposing unduly ‘punitive’ sanctions on employees who violate those obligations, lest the entire confidentiality obligation be overturned by a court.

Do courts generally side with those terminated from employment or the companies that terminate them?

While the past few years have definitely seen an uptick in decisions overturning overly broad and/or vague restrictions, courts continue to uphold separation agreements that clearly set out employees’ obligations and steer clear of the increasingly complex minefield of claims that cannot be released and post-employment activity that cannot be restrained. That said, parts of the country have long been perceived as being more ‘employer-friendly’ than others. Georgia courts, for example, are widely perceived to be straightforward in their analysis of releases while simultaneously zealous in their scrutiny of noncompete and nonsolicitation provisions to ensure that they’re fair to departing employees. Consequently, it’s always a good idea to clarify which state’s law governs the agreement as well as to include a severability clause to prevent a court from striking large parts or all of the agreement in the event one provision is found to be noncompliant.

DAVID E. GEVERTZ is a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta. Reach him at (678) 406-8716 or dgevertz@bakerdonelson.com.