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
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Updated to include provisions regarding franchisor liability, effective July 1, 2017.
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