Employee Separation Agreements: What Are They and What Should They Include?

An employee separation agreement is an important—yet frequently overlooked—contract that protects a company from future litigation for terminating an employee.  The contact represents a legal understanding between the employer and released worker, and when drafted clearly and concisely, produces a win-win situation for both parties.

Adopting a “better safe than sorry” attitude, most legal professionals would advise drafting an employment separation agreement for the majority of workplace terminations.  However for many business owners, this simply isn’t common practice.  

Nonetheless, a carefully-written employee separation agreement will protect the company from post-termination lawsuits (such as wrongful termination suits), will clarify difficult or complicated workplace situations, and will provide a level of closure and resolution to the termination process.  

What's an Employee Separation Agreement?

The employee separation agreement is a document that represents a contractual understanding between an employer and a soon-to-be fired employee.  When signed by both parties, the agreement mandates that the terminated employee cannot take future legal action against the company in regard to their release.  

In the U.S., the vast majority of employment is considered at-will, meaning that employers can release workers at any point and largely without cause.  However, there are certain grounds by which employers cannot terminate an employee.  This includes termination based-on group discrimination (such as on the basis of race, religion, sex, national origin, age, disability, citizenship, pregnancy, or genetic information) as well as termination as an act of workplace retaliation.  

Most of the time (but not exclusively), the separation agreement ensures that the terminated employee cannot file a wrongful termination claim against the employer.  This is important, because wrongful termination claims—even when they’re not awarded to the claimant—can have a significant impact on a company’s time, financial resources, and public image.  

If there is potential for a released employee to file a wrongful termination lawsuit on the grounds of discrimination or retaliation (or for other less-common reasons), the employer should strongly consider drafting an employee separation agreement.

So why would a terminated employee consider surrendering their rights (also called “waiving their claims”)?  The employee separation agreement usually stipulates that in exchange for waiving claims, released workers will receive benefits, a comprehensive severance package, and/ or other monetary sums in return.  

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What Should an Employee Separation Agreement Include?

Because the separation agreement is a legally-binding document, it must be enforceable and able to stand-up in court.  For this reason, the document should be well thought-out and carefully worded, preferably by a business attorney or other qualified legal professional.    

No two employee separation agreements will be identical, however here are a few provisions that are typically included:

Waiver of Claims

First and foremost, the separation agreement should clearly communicate the terms and conditions regarding the employee’s waiver of claims.  When a soon-to-be terminated employee waives their claims, they are essentially forfeiting the right to bring any future lawsuits against the company.  Depending on how the agreement is phrased, these might include compensation claims, employment law claims, or wrongful termination suits.  Importantly, the exact types of lawsuits that the employee is refrained from filing depends on the language in the separation agreement.   

Severance Pay and Severance Packages

A severance package is a collection of pay and benefits that a company offers an employee upon their unwilful dissociation with the company.  Severance packages usually apply to employees that are laid-off, fired, or retire.  In the instance of a termination, the company may choose to offer a severance package (or perhaps a supplemented severance package) as an incentive to sign the separation agreement.   The package can include a variety of benefits, such as additional payments, stock options, or health/dental insurance.  For employers, offering an appealing severance package is a useful way to negotiate with the employee within the framework of the separation agreement.  

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Other Important Clauses

In addition to the waiver of claims, employers may also choose to include other important protective clauses.  Similar to the waiver of claims, these clauses must be carefully-worded to stand-up in a court of law.   In other words, they should be prepared by a legal professional to ensure their strength and enforceability.  They include:

• A non-disparagement clause to ensure that the former-worker cannot publicly disparage the employer following the separation
• A non-compete clause to ensure that the employee cannot seek employment in a similar position of a direct competing business (if permissible in your state). 
• A non-disclosure provision to ensure that the terms and conditions of the separation agreement are kept private
• A company confidentiality agreement to ensure that company secrets (such as ideas, inventions, recipes, or other types of intellectual property) are kept private. 

General Fee: Separate from the severance package, an employer may offer the worker a sum of money just for signing the separation agreement.  These aren’t standardized, and while many contracts include a general fee, many do not.

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Getting Legal Assistance

As we’ve seen, the employee separation agreement is a great way for a company to secure their future interests, but it is only as strong as it’s language.  A poorly executed agreement may not withstand courtroom litigation and could put your company at severe risk for future lawsuits.  

Additionally, laws concerning employee separation agreements are largely written and enforced on the state-level, not the federal.  This is another key reason to get an experienced attorney involved before you draft your agreement.  Because of the complex and state-specific legal framework surrounding employee separation agreements, drafting and reviewing should be done with the guidance of a legal team.

For more information on what to do before termining an employee, click here.