Employee Separation Agreements – A Refresher, Part Three

LR-Conference-People-Close-up-hands-on-tableMy first two posts on this topic have discussed provisions that must – under federal law, specifically the Older Workers Benefit Protection Act – be included in employee separation agreements if the employee’s release of potential claims under the Age Discrimination in Employment Act is to be valid. And as I’ve pointed out previously, even if the employee is under 40 (and therefore isn’t protected by ADEA), it’s still wise to write the agreement in clear, understandable language and to have the employee confirm that he or she is entering into it knowingly and voluntarily.

Here are some other provisions of employee separation agreements that my clients often ask me about:

  • A release of the employee by the employer. Often requested by the employee or his/her counsel, but rarely granted. Employers have to be concerned whether the employee has engaged in some concealed wrongdoing that hasn’t been discovered, and they understandably are unwilling to release such claims. In some cases, the employer may offer an assurance that it doesn’t know of any claims it has against the employee; this gives the employee some comfort that the employer isn’t scheming to get a release while planning to turn around and sue.
  • Nondisparagement provisions. These can be difficult to enforce, and the benefit of enforcement may not justify the cost, but employers nonetheless often demand a promise by the employee not to make defamatory or disparaging remarks about the employer, its business, its management, etc.   Employees usually want such provisions to be reciprocal, but the employer has reason to be reluctant to make such a promise on behalf of all of its employees, since it can’t reliably control what they say. The result is sometimes a promise that specific managers and/or high-level executives and Board members will not disparage the former employee.
  • Reference requests. Not infrequently, a separation agreement will include a letter of reference to be used by the employee in seeking new employment. In such cases, the agreement may also provide that any written or oral reference requests will be referred to a specific individual (often the author of the reference letter), who will not say anything that contradicts the letter. In other cases, the agreement may simply provide that all reference requests will be referred to the HR department, which will (consistent with company policy) only confirm dates of employment, last position held, and final compensation.
  • Confidential information. It’s routine to include in a separation agreement an affirmation by the employee that he or she will maintain the confidentiality of the employer’s nonpublic, proprietary information and trade secrets. This may be accomplished by having the employee acknowledge that an existing confidentiality agreement remains in force, or the separation agreement may include a detailed confidentiality provision. Often, the employee also promises to keep the existence and terms of the separation agreement itself confidential, apart from disclosure to counsel, financial advisors, and family members.
  • Restrictive covenants. Sometimes an employee separation agreement will include nonsolicitation and/or noncompetition covenants. While a thorough discussion of such provisions is beyond the scope of this post, I will make two points here. First, it is extremely important to be aware of the law on restrictive covenants in your jurisdiction, in order to draft a provision that can be enforced. Second, don’t overreach. In general, restrictive covenants won’t be enforced unless they are reasonably drawn to protect some legitimate interest of the former employer. Covenants that are too long in time, too broad in geographic scope, or that restrict the work opportunities of employees who don’t actually possess any confidential information of the former employer, are often rejected by the courts.
  • Stock and options. Don’t forget to deal with any equity plans in which the employee participates. It’s not uncommon, where an employee is leaving on good terms, to allow unvested shares or options to vest, and/or to extend the exercise period for vested options. Consult employee benefits counsel to determine how much flexibility the company has with respect to such matters.
  • Tax issues. Two points here, as well. First, the IRS will not look with favor on any attempt to categorize separation pay as something other than wages. It is taxable income to the employee, and in general it should be treated as W-2 income, subject to the usual tax deductions, and not reported via Form 1099. Note that this means the employer pays its usual share of FICA and Medicare taxes as well. Second, if the employee is to be paid over time, rather than in a lump sum, and if the payment period starts in one calendar year and ends in another, it will be important to determine whether the agreement complies with the requirements of Internal Revenue Code § 409A (relating to taxation of deferred compensation). Consult counsel on this issue.
  • Wrapping up the employment relationship. There is usually a provision requiring the employee to confirm that he/she has returned all equipment, credit cards, confidential documents, keys, etc., as well as a provision setting a deadline for the submission of any unreimbursed business expenses. It is also common to have the employee agree that he/she will not re-apply for employment at any time in the future.

With that, I end this three-part “refresher” on employee separation agreements. I hope it has been useful to you, the reader, whether you are an employer or an employee, or counsel to either.  Perhaps the fundamental point to keep in mind is that a separation agreement is itself a “deal” –  a new contract between the employer and the employee that is separate from employment, in which the employer is paying money not otherwise owed to the employee,  and the employee is agreeing to give up claims he/she might otherwise be able to pursue, and taking on obligations that will be binding even after employment has ended.