WHEN SHOULD EMPLOYERS OFFER SEPARATION AGREEMENTS TO DEPARTING EMPLOYEES?
Unfortunately, most employment relationships usually end. Often, employees leave on their own. Often employers let employees go. In some cases, employees are terminated for cause and in some cases they are not.
In Florida, employment is “at will”, meaning that either the employer or the employee can end the employment relationship at any time without reason unless either there is an employment agreement that grants the employee additional rights or the employer terminates the employee for an unlawful reason.
In situations where an employer terminates an employee and there is no agreement requiring notice and opportunity to cure or other similar provisions, there are several scenarios where the employer may want to consider offering a Separation Agreement.
The Employer Wants a Release
There are often situations where an employer is concerned that a disgruntled employee that is being terminated may decide to bring an action against the employer. In these cases, an employer must view the situation as a transaction. The employer wants a release and in exchange for the release, the employer is willing to compensate the employee in order to obtain the release. The release is valuable to the employer because it protects the employer from negative consequences, including, but not limited to, a potential lawsuit.
How valuable is a release? It depends on how serious the risk is that the employee could cause damage to the employer or the business. For example, if the employee has a potential discrimination or harassment claim, and the employee is considering bringing an action and is willing to wait for that lawsuit to proceed and succeed, then the release may be very valuable. If the employee was fired for cause and there appear to be no grounds for a lawsuit, the release may not be as valuable or necessary.
However, regardless of the value of the release, if the employer requests that the employee agree to a release, the employer must compensate the employee in some manner and the compensation must be in excess of what the employer owes the employee. This is referred to as consideration.
Determining the value of the release is useful in figuring out how much an employer will pay. Additionally, an employer may not want only the release. The employer may also want additional clauses, such as a non-disparagement clause or other specific terms from the employee.
The Employer Wants to Help the Employee
Not every termination is a result of bad actions or lack of performance by the employee. In many situations, an employer may decide to terminate an employee for business reasons that have nothing to do with the behavior or performance of the employee. For example, the business may not be generating enough profit to support the costs of the employee or the business may be cutting back its operations. There are many situations in which a business feels that it must cut back its workforce.
In many of these situations, the employer may feel a moral obligation to provide severance to the employee to help the employee until such time as the employee is able to obtain new employment. Regardless of the good intent on the part of the employer, in these situations it is still advisable for the employer to request that the employee sign a separation agreement in exchange for the severance payment.
WHAT CONSTITUTES CONSIDERATION
“Consideration” means something of value given in exchange for something else of value. For a terminated employee’s release of legal claims to be enforceable, the employer must provide the employee with a monetary incentive or other item of value to which the employee otherwise is not entitled. Payments or benefits to which the terminated employee is otherwise entitled pursuant to employer policy or law (e.g., accrued and earned salary, commissions, vacation pay or severance pay specified by an employee handbook) will not qualify as consideration. Examples of consideration that employers may consider offering in exchange for a valid release are extremely broad and include, but may not be limited to, severance pay, continuation of health or other fringe benefits at the employer’s expense, bonuses, outplacement and/or a positive letter of reference.
Standard Terms
Every negotiation is different and some employers may offer different terms than others. There are usually no requirements for the amount of a severance payment, other than the fact that there must be some form of additional payment in order for there to be consideration to support a release.
Severance pay generally takes two basic forms — a lump sum payment to the employee or payments for a specific time period, usually through regular payroll procedures. While employees generally opt for the “pile of money,” employers should consider fashioning the payment as a series of periodic payments. In addition to easing cash flow, the salary continuation form of severance enables the employer to protect itself and ensure that the employee will comply with their obligations under other provisions of the agreement (e.g., preservation of confidential information, non-solicitation and non-disparagement of the employer). For all practical purposes, such leverage is lost upon delivery of a lump sum severance payment to the employee.
Employers may also consider having at least a portion of the severance payment (and/or continuation of medical benefits) conditional upon whether the terminee has obtained alternate employment. For example, an employer could agree to guarantee the several months of severance pay and offer up to an additional amount of severance pay (on a week-to-week or month-to-month basis) subject to a notice from the terminated employee that they have not obtained alternate employment. We have found this to be a useful negotiating tool often helping to bridge the gap between the severance positions of the respective parties.
As previously mentioned, in addition to a release, employers often seek non-disparagement clauses, restrictive covenants, such as non-solicitation clauses, or confidentiality provisions, or an agreement by the employee to assist the employer in certain circumstances.
Benefits of an Employment Separation Agreement
Employment separation agreements can have a number of benefits for an employer. The main benefit is that the separation agreement can prevent an employee from suing the employer. Although many employees may be happy at work and appear to have no problems with the employer, once they are terminated, they may decide to bring an action against the business for many reasons.
Conclusion
A tightly drafted separation or release agreement is an excellent and cost-effective way for an employer to avoid liability arising from employee lay-offs and other separations and is something that employers should consider in most separation situations.