Magic Words: Severance and Release

One of the main reasons for a separation agreement with an employee is to obtain an effective release of claims against the employer. However, ensuring release agreements are effective and enforceable is becoming increasingly challenging as more and more states have specific requirements and restrictions.

Quick Hits

• Crafting effective multistate separation agreements can be challenging for employers amid an increasing number of state-specific requirements and restrictions.
• Employers may want to consider updating their template release agreements, confirming their agreements state sufficient and proper consideration for employees to release claims, and whether their separation agreements properly incorporate any desired restrictive covenants, arbitration agreements, or other agreements.

While crafting effective separation agreements is a common issue for employers, they often rush to complete them in the face of a sudden separation or large-scale reduction in force (RIF). Prior planning and staying current on the changing legal landscape are key for employers when crafting enforceable separation/release agreements.

Here are three key considerations for crafting separation agreements.

1. Using Templates

Many employers use template separation agreements to make it easier to manage the process and to generate the necessary documents, particularly in the face of a large-scale reduction. Employers have multiple approaches to consider for templates, from maintaining individual templates for each state where the employer has employees to a general template with appendices for relevant states:

• Maintaining templates for every state where the employer has employees—This approach can be challenging as some employers may need to have templates for all the relevant jurisdictions that have specific requirements and may need to have separate templates for employees under forty years old and for those employees forty years old or older that contain the necessary Older Workers Benefit Protection Act (OWBPA) disclosures, among other variables.
• Bundling states—This approach involves putting states with similar or no specific requirements together in a template. The benefit of this approach is that it involves fewer documents that employers’ human resources (HR) departments have to put together during a RIF.
• Templates with an appendix—This approach involves creating a template with an appendix specifying any relevant state-specific requirements or other variables.

Employers may want to consider which approach is best for their business based on their risk tolerance, capabilities to generate and process all the required documents, and other considerations.

2. Providing Adequate Consideration

For any release of claims to be enforceable, it is important that the release is supported by “adequate consideration,” which must be consideration that is above and beyond what an employee is otherwise entitled. As such, employers may want to delineate in separation agreements which payments are part of required payments under certain laws or obligations (e.g., earned paid time off (PTO) that is required to be paid out or earned bonuses or earned incentive compensation) and what payments are voluntary payments being made as consideration for employees releasing their claims.

3. Incorporating Restrictive Covenants and Other Agreements

Another part of a separation agreement may be the inclusion of certain restrictive covenants, which may include noncompete and nonsolicitation agreements, or the continuance of existing restrictive covenants entered into previously or as part of some previous employment agreement. However, properly including new agreements or incorporating existing agreements in separation agreements is an issue that is often overlooked. Additionally, the enforceability of such covenants is generally a state-specific issue.

Separation agreements may need specific integration clauses that incorporate previously signed employment agreements to ensure that such prior agreements are included in the separation agreements and continue to be enforceable following the employee’s separation. In certain situations, it may be appropriate or necessary for employers to include the new, specific language of restrictive covenants or arbitration agreements in separation agreements to protect their business interests.