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Season 1, Episode 8: Separation Agreements: What Employers Need to Know

From Lawyer to Employer: A Shipman Podcast

October 17, 2022

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Tune in as veteran Labor and Employment lawyer Dan Schwartz discusses separation agreements with podcast host, Gabe Jiran. During this episode of ‘Lawyer to Employer’, Dan explains what employers need to know when using separation agreements as part of terminations, resignations, layoffs or reductions in force (RIF). He explores various applications for separation agreements, when employers should use them, what employers need to include by law and what they may consider including (or not including). Dan offers suggestions on non-economic and economic incentives for employers to achieve the ultimate goal—the employee’s signature on the separation agreement.

Transcript

HOST: Welcome to From Lawyer to Employer: A Shipman Podcast, bringing you the latest developments in labor and employment law, offering you practical considerations for your organization. You can subscribe to this podcast on Spotify, Apple Podcast, Google Podcast or wherever you listen. Thank you for joining us, and we hope you enjoy today's episode.

Gabe Jiran: Welcome to today's episode of From Lawyer to Employer: A Shipman Podcast. Once again, I'm your host, Gabe Jiran, and today I'm joined by my partner and employment lawyer, Dan Schwartz. Dan has decades of experience representing employers in matters involving reductions in force, in hiring, in termination. So today he and I are going to be chatting about separation agreements, which is something that we both do on virtually a daily basis. Good morning, Dan. Thanks for joining us.

Dan Schwartz: Gabe. Good to be with you.

Gabe Jiran: Dan and I are both employment lawyers. And so this is something that is near and dear to our heart because we get calls all the time from clients asking about separation agreements. So we're going to talk a little bit about that today and also what the component parts are.

One of the most common questions I get, Dan, is a client will call up and say, "Well, do I have to give somebody a separation agreement?"

And - what's your answer to that?

Dan Schwartz: Well, the answer is actually quite simple. The answer is no. You really don't have to give anyone a separation agreement. But separation agreements do have some valuable purposes here. One is to provide a safety net for employees who may be getting let go – for no fault of their own. There may be a 30 year employee whose job you're eliminating in a reduction in force. So that may be one. And then the other reason is to give the employer some guidance and some answers to how this relationship is going to end.

Gabe Jiran: That's something that I've found too, is that having some certainty in the process of separating an employee can really help. And when I think about separations, it's sort of a general term. You have – what -three different types, a termination, you have a resignation and then a layoff or a reduction in force. Could you use a separation agreement for any one of those?

Dan Schwartz: Sure. You really can. I think they become more common in- either a reduction in force or even termination. But we've done it where the employee says they want to resign. And maybe the employer wants to get some consulting from the employee or, you know, wants to resolve some issues that have been hanging around maybe with regard to pay or a complaint that the employee had. So, separation agreements have a number of important purposes to it, and it's not simply a one size fits all solution.

Gabe Jiran: Yeah. I sometimes get questioned and some clients - there's a little confusion about the difference between severance for an employee versus a separation agreement or a severance agreement. And what I've seen is some- of our clients actually have severance provisions like in a policy or something that says whatever the separation is, and that's usually defined in the policy that you'll get paid out something. But that's separate and distinct from a separation agreement, right?

Dan Schwartz: It is. You know, a lot of employers, going back now 20 years used to have severance policies that would pay people severance but typically wasn't contingent upon an employee signing a release and a separation agreement. That's changed over time. And in fact, in some of the companies that still have severance plan provisions for executives and such still make a contingent upon signing a release. And really that's been the biggest shift I think over the last 20 years, is there are very, very few employers left that will pay severance without making it contingent upon a release.

Gabe Jiran: Yeah, excellent point. It's sort of like I'm going to pay you something, but I want something in return as the company to protect me. You make a great point though, particularly for higher level employees, sometimes it’s already baked into the employment contract, right?

Dan Schwartz: It is. It's either in a contractor or in a plan itself. And that's actually a good practice, right? Because at the start of a relationship, things are great, everyone's on the same page, everyone wants to start. So why not build in for higher level executives, you're going to get, you know, six months severance, a year severance, whatever the- the number is. And then at the time of termination, it's presented to the employee and there should really at that point be no negotiation. It's here's the agreement that you agreed would be fair at the start of a relationship. So getting that done at the start is a underutilized tool for employers.

Gabe Jiran: Yeah. I'm going to go off the script, even though we really don't have a script, I'm going to invite you back because we should talk about employment contracts in the next episode, given the labor market, what it is right now and- and the problems that our clients are having recruiting qualified talent, the terms of an employment contract, particularly a severance provision at the outset when everybody's happy and, it's all kumbaya, that could be a useful tool and a good conversation for our clients to hear about, is what can you do to recruit and retain? But that, we'll save that for another day.

Now let's just assume there's nothing in an employment contract or anything that has severance involved. When would you use a separation agreement?

Dan Schwartz: Well, I think typically you'd use a separation agreement and what I'd call the sort of ordinary performance terminations, that the employee hasn't committed a policy violation or didn't steal from you or those types of egregious behaviors. In those situations, you're not really going to do a separation agreement just firing the employee. But in other situations, again, maybe it's a longer term relationship, maybe it just hasn't worked out as some employers like to say.

In that case, you're going to want a separation agreement to help close out the relationship. And there may be other reasons why you want to do that too. Maybe there's a restrictive covenant that the employee has signed like a non-compete and you want to either clarify that or revise the terms of that. So the separation agreement becomes a tool to manage the exit of the employee.

Gabe Jiran: You know, that's a great way to put it, managing the exit. Because especially for a longer term employee, when they came in, things may have changed dramatically to the point now that where you're separating. And they- could have started as an entry level position and now they've risen up to an executive level and- and their terms and conditions of employment have changed. And you might consider on both sides that some sort of arrangement would be good, particularly if you're looking for like cooperation after the separation or something like that. So you mentioned a release though, would that be a required part of any agreement?

Dan Schwartz: Not necessarily a required part, but it is really the critical component, I think for employers, right? The employers are trying to in essence, buy peace, which is, we want this relationship to end on good terms or as good a terms as you can. And so because of that, we're going to pay you some severance, and as a result of that, we expect that you won't sue us.

And that's a good way to think about it. It's simple, it's just a transactional basis. And the notion that some employers had again, 20, 25 years ago that somehow employees would be offended by this notion. I think employees would be, now more offended if they're not offered a severance agreement than having the strings attached. I think that becomes sort of the expectation of where we are today.

Gabe Jiran: I've seen that particularly at the higher level. It is almost an expectation of the employee. And so I think that old stigma that you're signing an agreement is long gone. Although, one thought I had on that topic was that I had this philosophy, I don't know if it's true or not, that the way you treat an employee as they leave will dictate how they treat you in the future.

And so this can be a nice vehicle to have a somewhat amicable separation even if the employee doesn't really deserve it. Now, obviously you said like somebody stealing from you, you're probably not going to do a separation agreement. But for the more common terminations where it's just not working out or it's a performance issue or something like that, it is a nice way to sort of shake hands, even if virtually these days and move on with the relationship. Other than the release though, what are some of the other components you would include?

Dan Schwartz: Well, there's actually a federal law that isn't sometimes well known called the Older Workers Benefit Protection Act, or as lawyers like to give shorthand for, OWBPA. And that law dictates that for any employee who's 40 years or older, the employment agreements have to contain certain terms in order for the agreements to be valid. For those who are under 40, the courts have said all that's really required is that the employment agreements be knowing and voluntarily released.

And so for those who are over 40, you're going to want to give them certain things like 21 days to consider the agreement, seven days to revoke. You're going to want to tell them that they have the right to consult an attorney as well. So those provisions get baked into an agreement because of the law. And then there are other provisions that employers may consider like a restrictive covenant or a confidentiality clause, a cooperation clause, as you mentioned, non-disparagement, all those other clauses get built into it, depending on what the needs of the employers are.

Gabe Jiran: Yeah, I always chuckle as I think about when you hit age 40, now you're in a protected class and there's these provisions that apply in the law. But you know, when I turned 40, it was like the one thing that I could celebrate is that now I'm in a protected class. But you mentioned some of these other provisions that you might include.

And I think it is important to emphasize that it's not a one size fit all type of situation. It's not just like you have your template and you just change the name there, and you are going to go off and have the employees sign it. And so I'm going to name a couple provisions that I've used or seen, and I'm anxious to hear your thoughts on them. What about a non-disparagement clause?

Dan Schwartz: You know, non-disparagement clauses are at an interesting point. We're now seeing some legislation recently that some non-disparagement, some confidentiality clauses when it comes to resolving claims of sexual harassment may be prohibited. I think non-disparagement clauses are a useful tool for employees. They get the employer sometimes to agree to instruct certain employees not to disparage them. And for the employers, they get an employee who may not be putting up things on Glassdoor and other public websites that you're trying to preserve. So again, it's sort of a way to part ways amicably. It's not that you have to say nice things, but you won't say necessarily bad things on the way out the door.

Gabe Jiran: My view of the non-disparagement has been, it's for the most part a preemptive measure. It's hard to enforce, but like you said, it’s a nice way to end the relationship where we talk with the employees like, okay, so now we understand each other on this, we're not going to say bad things about each other and let's move on.

Dan Schwartz: I would say there some other provisions that sometimes employers don't think about, but become sort of critical, like are you going to contest unemployment benefits? That becomes really important to the employee who may want to seek unemployment benefits. And so there should be a provision there of how are you going to handle those requests from the government? And I think a lot of employers sort of just brush past that. Like I will worry about that later, but that's something you can put in the agreement that isn't thought of.

Another type of thing that you can think about is also dealing with benefit continuation. How's COBRA going to be handled? Is the employer going to contribute at all to the benefits? Health benefits right now become very important to employees and they are a very useful tool to getting employees' concerns resolved. So from an employer perspective, don't just think about, hey, how many weeks of severance are we going to give this person? But you might want to consider, hey, if we throw in a month or two of, continuation of health benefits, that might be really important to the employee. Maybe their family member has a health issue and they're concerned about losing their healthcare.

Gabe Jiran: I agree with that a hundred percent. Another provision I've used that's noneconomic is if somebody's being terminated, whether you would consider it to be a resignation under the circumstances so that if they're going to get another job, that they can say, "I resigned." And that is, I've seen that to be of great value to employees because then they can explain, and be telling the truth that they resigned.

Dan Schwartz: And in this time of this sort of great resignation, employees who resign it's not nearly the stigma that it was even a few years back. I think employers really have such a need for employee right now that they're willing to take people who resign without really questioning the results of that.

Gabe Jiran: One thing you mentioned that I don't want to forget to ask you about is you mentioned weeks of severance. So I get that question all the time. Like, wow, isn't it like a week per year or of service or two weeks per year of service? What are you seeing?

Dan Schwartz: There is no formula. It really depends on the position, depends on the industry, which we often don't talk about, and it depends on sort of past sort of practice and philosophy of the employer. I do think the week per year of service is a good rule of thumb, but at some higher levels, it may be two weeks. And even for lower sort of "levels" one week may not fully address some of the issues.

I think ultimately you want to have a severance that is fair, and ultimately for the employer, you want a severance that is enough that the employee is going to sign the agreement. That's the key part of a separation agreement. Too many employers forget that, which is the goal here is to get a signature, not to have lots of negotiation and everything else because a lawsuit in the future may cost five times the amount of severance that you are paying.

Gabe Jiran: It's an excellent point. My approach is usually I start with a week per year. Let's just see what that looks like. We'll just use that as the baseline. But to your point, I always say there should be minimums also, and that can vary depending on the position, but that's exactly the point you're making, is that it can't be too low. You can't say I'll give you a day of pay and I'll sign this like five page release, you know? Right. It's just not going to work.

Dan Schwartz: No, exactly. The couple of days of severance. Well, if you're looking at it from the employee's perspective, what's the incentive to sign a really onerous agreement? So some balance is it’s always a good guiding post for these agreements.

Gabe Jiran: Yeah. And on that point, if, we didn't make it clear before, in order to support the release of claims saying that the employees never going to sue you, you have to give something of value. Traditionally, you would think of that as money, but it could be a continuation of health insurance like you said, it could be continue of some other benefit, you know, paying out vacation leave to the extent that you're not required to do so already under a particular state law.

Dan Schwartz: And you know, if an employer has already promised an employee you're going to get one month of severance without a release, then the employer can't just stick it into an employment agreement or a separation agreement and go, "All right, now sign this release." You have to give them something more of value. And that's required by both Older Worker Benefit Protection Act, but also common law as well.

Gabe Jiran: So another provision I wanted to ask about that comes up quite often in the agreements that we draft is a no rehire provision. So why would you use one of those?

Dan Schwartz: Again, one of those provisions is sought after because you don't want the employee to file an application and then say, "I wasn't hired because I complained about discrimination," or, "I wasn't hired because I'm an older worker." So putting that provision in there avoids those types of claims. It's a useful provision in some agreements. Again, not a one size fits all. There may be times maybe it's a reduction in force, for example, where you really don't mind the employee coming back. It just your business has to be cut by 25%. And you know, if it comes back, you would love to have that person back. So why put that no rehire provision in there? It just makes it look like you're against the employee unnecessarily.

Gabe Jiran: I agree. And then rarely would use one in a reduction in force or a job elimination because when the employee or the employee's lawyer looks at and says, "Well, wait a minute, you told me you're eliminating my position, now you're saying you don't want to rehire me? Like what gives? Is there some other motive here?" And so you don't want to put anything that would be inconsistent with that.

Dan Schwartz: No, and while we're on reductions in force, I should note that there are special rules that reductions in force has. There's additional information that those releases have to contain in terms of job titles and ages of those impacted by reductions in force. So getting back to your point on sort of the one size fits all, like you do not want to just pull an agreement off the internet or use something you've done before because for reductions in force, and that is two or more employees being let go at the same time, there are really specific rules that need to follow, or your release is just going to be thrown out.

Gabe Jiran: Yeah. That’s a very good point as well. And in these days we are doing a lot of those and you have to make sure that those provisions are in there and accurate. We've reached pretty close to the end of our time here. So I'll give you an opportunity. Any closing thoughts?

Dan Schwartz: Yeah. So separation agreements is a topic I love, I've talked about it before. You can find some additional information about it both on the firm blog, employmentlawletter.com, but also on a blog that I've run for nearly 15 years called The Connecticut Employment Law Blog which we recently redesigned and is a great resource for employees and employers alike to look at and understand employment law issues.

Gabe Jiran: Great. Well thank you Dan, for joining me today. It's been a pleasure. And, for our audience, as always, we're very happy that you're listening in and we look forward to you joining us in our next podcast. Have a great day.

HOST: Thank you for joining us on this episode of From Lawyer to Employer: A Shipman Podcast. This podcast is produced and copyrighted by Shipman & Goodwin LLP all rights reserved. The contents of this communication are intended for informational purposes only and are not intended or should not be construed as legal advice. This may be deemed advertising under certain state laws. Subscribe to our podcast on Spotify, Apple Podcast, Google Podcast, or wherever you listen. We hope you will join us again.

Gabe Jiran: So another provision I wanted to ask about that comes up quite often in the agreements that we draft is a no rehire provision. So why would you use one of those?

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Season 1, Episode 8: Separation Agreements: What Employers Need to Know

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