Separation Agreements

April 6, 2021

By: Colin A. Walker

Separation agreements help companies and employees avoid disputes and achieve an amicable separation of their affairs at the end of the employment relationship. Some of the most common and important provisions are discussed below. 

Severance Pay
One of the chief provisions of any separation agreement is severance pay. Without it, the employee has little incentive to sign the separation agreement. The amount of severance depends on many factors such as industry practice, the executive’s compensation at the time of separation, how long the executive worked for the company, whether the executive or the company have any potential claims, and other provisions of the separation agreement.

Severance can be paid in a lump sum or over time. There are advantages and disadvantages to both. Payment by lump sum ends the relationship between the company and executive sooner and decreases the potential for future disputes. Payment over time may lessen the financial burden on the company and can help to ensure compliance with provisions such as confidentiality, non-disparagement, and return of property.    

Another important provision is a release of claims. This is especially important if the executive has any potential claims against the company, such as discrimination, harassment, or whistle-blowing. However, even if there are no known claims, it is prudent to have a release, as claims which were unknown at the time of separation sometimes arise later.    

A frequent point of contention is whether the company will release the employee. Certainly, if claims have been threatened against the C-Level executive, a release is appropriate and the executive should insist on one. On the other hand, even with no known claims, many executives will insist on a release on the theory that “what’s good for the goose is good for the gander.” Some companies are reluctant to release an executive from unknown claims out of fear of learning later that the executive engaged in fraud or other misconduct without the company’s knowledge. As with other issues discussed in this article, the scope of a release is often the subject of intense negotiation and depends on the parties’ relative bargaining power.

Confidentiality and Non-Disparagement 
For the company, confidentiality and non-disparagement are often important issues. The company may be concerned that, if it became known that it paid a hefty severance payment to an executive, other employees might negotiate for more severance pay. Companies are also frequently concerned about damage to their reputations by the departure of a high-level executive, particularly where the separation is contentious.

Here again, there are often questions about whether the confidentiality and non-disparagement provisions should apply to both the executive and the company. The executive has as much incentive to protect his/her reputation, and perhaps more since the executive will usually be looking for new employment.  Companies can legitimately argue that they cannot be bound by a non-disparagement provision because, as an organization, it is made of many individuals who may have many different opinions about the departing executive and the organization has little ability to control them. This issue can be addressed by limiting the non-disparagement restriction to certain specific positions or individuals within the organization, such as officers, directors, human resources employees, etc.  

Enforcement of such provisions may be difficult. The party enforcing the agreement has the burden of proving a violation and disclosure often occurs in a way that makes it difficult or impossible to prove a breach. If it does, it will then have to prove damages to obtain a monetary judgment and this, too, can be difficult.  

Provisions Omitted from Prior Agreements
A separation agreement provides an opportunity to “clean up” the relationship between the parties. While companies should strive to include all the necessary and desired provisions in employment agreements, IP agreements, non-compete agreements, etc., mistakes do happen. If so, the erroneously-omitted terms can be included in a separation agreement.  

Other Provisions
The discussion in other posts regarding choice of law and venue, arbitration, and attorneys’ fees, also applies to separation agreements.