In this economy, more and more employees at all levels are being shown the door and “asked” politely to sign some form of separation agreement which likely includes a release of all claims against an employer, in exchange for a sum of money, benefits or a combination of both. They are typically referred to as a “Separation Agreement”, “Separation and Release”, “Severance Agreement” or some variation on this theme.

Essentially, the employer will offer to pay consideration to the departing employee in exchange for a general release from any and all claims the employee had or may have had prior to the date of signing. It may also require some obligations of the employee going forward, e.g., maintaining confidentiality. Many of these arrangements and releases could be used by employees as a bargaining tool, so both employers and employees should be aware of the facts.

Employment Agreement

The first step an employee should take when being presented with any form of separation and release agreement, is to figure out if he or she is currently under any restrictive covenants and get an understanding of the nature of the restrictions and how they came to be. Perhaps the employee had an employment agreement when he or she started.

Potential Claims

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Second, the employee should determine if there are, in fact, any potential claims he or she may have against the employer, which may have prompted the employer to offer the agreement to the employee in the first place. An example could include gender discrimination, failure to pay commissions, etc.

If there is any question in the departing employee’s mind whether a claim exists, it makes sense to speak with an employment attorney for this purpose. If not, it is still important to look out for clauses such as a mutual non-disparagement/neutral reference and non-opposition of unemployment (if applicable), just to name a couple.

Non-Competes

A very important provision in a severance agreement, both to an employer and employee is the non-compete. A non-compete clause, generally speaking, restricts an employee from practicing his or her trade, for a certain period of time within a specific geographic area.

In the sales and marketing industry, the term of the restriction typically ranges in duration from one to three years; the scope can restrict selling and direct targeting in an entire industry, working directly for the competition or somewhere in between.

Consideration

If an employer asks an employee to sign a non-compete whether the employee is currently working or departing, and fails to offer anything in return other than the continuation of employment or other value to which the employee is already entitled, such as unused vacation, comp days, benefits, earned but unpaid wages including commissions, ultimately the non-compete may not be enforceable. Both parties must receive something of additional value in the new deal, otherwise known as “consideration”.

Accepting what is already legitimately expected or owed is not something of additional value under the law and therefore no enforceable agreement is created. However, if the offer is within the context of a departure, any dollar amount is likely sufficient to constitute consideration under the law in most jurisdictions.

Locked In

If an employee has already committed to a non-compete, there's a possibility that no adequate consideration was provided at the time of contract, no legitimate business interest is being protected as required by certain states or the market has contracted so much that the geographic or industry restraints are overly burdensome. This non-compete may not be effective.

To Sign or Not to Sign

Some, but not all courts, have ruled that a company’s handbook amounts to a binding implied contract between a company and an employee. This is especially true if the handbook is tied to a defined severance plan under federal law. It is important for an employee to review the company’s handbook or policy on severance payments/packages to determine if it is necessary for the employee to sign a potentially one-sided document, i.e., separation agreement, while gaining nothing or very little in return if a company policy already requires severance (See Consideration above).