Overview: Employers may use termination agreements to limit post-employment legal liability or protect sensitive company information like trade secrets and/or client lists. The effectiveness of such agreements will turn on whether the agreement remains enforceable in the post-employment period, a standard which may be applied differently in each state.
Termination agreements crafted to reduce or eliminate post-employment legal liability typically include a "release of claims" to be executed by the outgoing employee. These agreements may be voidable if the employer does not offer something valuable in exchange for the agreement not to sue or if they are crafted in a way not easily digestible by individuals without a legal education. HR professionals must negotiate these agreements in good faith, encourage employees to seek legal counsel regarding the terms, and offer fair consideration in exchange for the waiver.
Termination agreements aimed at protecting business information may be referred to as "non-compete" agreements or "restrictive covenants". HR must help craft these agreements in a way that balances the interests of the employer with the post-employment needs of the employee. Strict restrictions on competition, geography or time may render the agreement unenforceable if it is not considered reasonable when compared to the employer's competing interest. Also, an agreement may be declared void or adjustable if the employer did not provide something adequate in exchange for the guarantee not to compete. Finally, some states have regulations that the employer must follow in crafting these agreements. Should the employer not abide by those terms, the agreement in question may be voided on its face.
Trends: Considering the varying standards used to analyze such agreements across the 50 states and District of Columbia, it is crucial to decide which state law should apply. This is particularly important when the employer is being reorganized, acquired or merged with another company. Identifying employees to whom a restrictive covenant should be offered could help ensure a smoother transition from one operating structure to the next. Once it is known which employees pose post-employment risks, the employer should then be sure to consult the applicable state law.
Author: Michael Jacobson, JD, Legal Editor
An employer may use this form to build or reach a severance or "termination" agreement with an outgoing employee when the employer is either contractually bound to provide severance or it determines that providing severance is in its best interests. Common scenarios in which employers elect to provide severance are when they desire a (mostly) clean break with an outgoing employee, they desire to maintain good relations with the outgoing employee or when the employer desires some protection from the outgoing employee against risks associated with litigation, competition or security.
Use this workflow to properly choose the appropriate employees to be included in a reduction in force, and to navigate through the requirements of the Worker Adjustment and Retraining Notification (WARN) Act without creating further exposure for the employer.
XpertHR has added new content on creating severance or termination agreements with outgoing employees. These agreements can be tremendously helpful in protecting employers from risk following employee terminations.
A severance or termination agreement is a great way to make a mostly clean break with outgoing employees. This checklist will help an employer identify all the important points to address during the negotiation and drafting of severance or termination agreements, and will also identify some common pain points and pitfalls of poorly drafted or unfair agreements.
A severance or termination agreement is a very effective tool for an employer to use to make a mostly clean break with outgoing employees. However, there are important restrictions on the type of consideration employers can ask for as part of severance or termination agreements. This How to will help employers walk through the process of negotiating and drafting such an agreement and can be useful in protecting the company and ensuring the agreement is enforceable in a court of law.
In-depth review of the spectrum of California employment law requirements HR must follow with respect to voluntary terminations.
In-depth review of the process HR should follow when terminating an employee.
The EEOC alleges in a recently-filed lawsuit that CVS unlawfully violated employees' rights by conditioning the receipt of severance benefits on an "overly broad, misleading and unenforceable" separation agreement that could deter employees from filing discrimination charges or voluntarily communicating with the EEOC. Employers should continue to follow the development of this case as it will likely have an impact on employer separation agreements.
HR and legal considerations for employers regarding termination agreements.