Primer on Severance Agreements

The purpose of a separation/severance agreement is to minimize risk from employment termination, to compensate an employee for employment loss, and, contractually, to finalize the employment relationship.  It is an important tool for employers.

Primary Components of Separation Agreement:

1. Background information (as appropriate) defining reason for separation
2. Define final pay and statement that employee has been paid in full/received all benefits (including any vacation pay and COBRA rights, if any)
3. Define Severance Payment
4. Include Comprehensive Release
5. Return of Company Property
6. Confidentiality (of Separation Agreement)
7. Confidentiality of Proprietary Information/Trade Secrets (or incorporate existing agreement)
8. Non-Solicitation (or incorporate existing agreement)
9. Non-Compete (or incorporate existing agreement)
10. Anti-Piracy Provision (cannot steal employees)
11. Non-Disparagement
12. Clawback/Remedies Provision detailing that employee violates any terms of Agreement that employee would forfeit severance payment, but (importantly) all other terms of Agreement remain valid.
13. If over 40, Older Worker Benefit Protection Act requires:
    a. Must refer to rights under the ADEA – Age Discrimination in Employment Act
    b. Must advise employee to consult with attorney.
    c. Must provide 21 days to consider offer (45 days if part of exit incentive program).
    d. Must provide 7 days to revoke signature.
14.  When 2 or more employees are terminated at the same time and the employees are provided Separation Agreements, it may qualify as an “exit incentive program” or “other employment termination program.”  In this case, employer must include attachment to Separation Agreement that sets forth:
    a. Decisional Unit – class, unit or group of employees who were and were not terminated
    b. Eligibility Factors
    c. Job Titles and ages of all individuals eligible or who were selected for program and ages of all individuals in same job classification who are not selected for program.
15. ** Note:  This list is not all-encompassing, but is summary of primary provisions.  It does not include any standard “boilerplate” provisions that must be included.  Also, as with any legal contract, it should be customized for each individual employment situation.

Remember: a separation agreement is a contract. So, it must have consideration (additional compensation).

A separation agreement can be invalid if an employer uses fraud, undue influence, or other improper conduct to coerce employee to sign it.

Merritt Green on Separation Agreements