Breaking up is hard to do − but a good separation and release agreement can ease the pain

Every separation with an employee is unique and should be handled sensitively, especially if there is potential for disputes. It’s a good idea to consider entering into a separation and release agreement in potentially contentious situations. These agreements should be well thought out and up to date, as the law changes and outdated forms can create unintended liability.

Here is a checklist for employers approaching a breakup with one or more employees:

1. Conduct a review of the employee file

Most employees in the U.S. are employed at will, meaning that the relationship can be terminated at any time by either the employer or the employee. But when considering a termination, employers should determine whether there are any agreements that address ongoing obligations of parties. For most employees and emerging growth companies, we’d typically expect these to be in an offer letter and invention assignment agreement, but others might include an employment agreement, restrictive covenant agreements (e.g., NDAs, non-competes, or non-solicits), stock awards, severance plans, promissory notes etc. The starting point for any separation agreement should be surfacing any applicable provisions in those agreements addressing what happens in the event of a breakup − even though the parties remain free to reach a mutual agreement that may alter and/or supersede any previously agreed-upon terms.

2. Secure a proper release of claims

Employers should consider offering employees a separation payment in exchange for a broad release of claims against the company. Unless an employee already has a contractual right to a certain severance amount, there is generally no magic amount that an employer must offer in exchange for a release. Employers often use length of service to determine the severance amount (e.g., X weeks of severance pay for each year of the employment relationship, up to some cap).

An effective release should include a comprehensive waiver of both common law and statutory claims, but must not include claims that cannot be waived as a matter of law. For example, an employee cannot waive the right to file a charge with the EEOC, generally cannot waive claims under the FLSA, and in many states (including, but not limited to, California, Florida, Illinois, New York, and Texas) cannot waive claims for unemployment and/or workers’ compensation benefits.

3. Over 40?

Whether an employee is over or under 40 will impact the type of language needed in the Separation and Release Agreement. For an employee who is age 40 or over, a 21-day review period and 7-day revocation period is required for a waiver of claims under the Age Discrimination in Employment Act (ADEA), as amended by the Older Workers Benefit Protection Act (OWBPA). A litany of other OWBPA factors (commonly put in a single paragraph) must also be included.

In the event of a company restructuring or other reduction-in-force program, a valid ADEA waiver requires that separating employees aged 40+ also be provided (i) a 45-day review and consideration period (plus the same 7-day revocation period) and (ii) information of the job title and age of those individuals included in the layoff (usually provided in chart form), along with the job title and age of those individuals within the same “decisional unit” who are not being terminated.

4. Wash those unlawful provisions out of your agreements

Well thought-out agreements are not only customized but up to date.

Let's look at the most recent clauses that legal developments require be deleted:

• Clauses prohibiting the employee from communicating with a government agency about a potential violation of law (or requiring the employee to first inform the company before disclosing such information to a government investigator)
• Clauses barring (or limiting by requiring prior notice and permission from the company) the employee from cooperating with the government in a complaint or investigation against the company
• Clauses precluding the employee from a monetary recovery awarded in an action brought by a government agency (e.g., whistleblower claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act)
• Clauses broadly preventing the employee from making any disparaging (even if true) comments about the company or its officers, directors, or employees to government officials/agencies
• There are many ways to comply such as eliminating overreach and cutting the unnecessary. At the very least, including a disclaimer stating that "nothing in the agreement precludes the employee from providing truthful information to, or participating in, an investigation or proceeding conducted by a government agency" is a good temporary stopgap.

5. Protect the crown jewels

Companies certainly have the right to maintain and protect their property, confidential information and goodwill. A separation agreement should reference any existing restrictive covenants that an employee has signed, including but not limited to provisions governing non-disclosure of confidential information, non-competition and non-solicitation of clients and employees. It may also expand on those or add those for employees with no such agreements. However, it is important to note that due to the constantly evolving non-compete laws and practical constraints, compliance with each state's specific limitations and requirements is essential.

In drafting non-disclosure provisions, employers must also be mindful of the Defend Trade Secrets Act of 2016 (DTSA). Pursuant to that statute, employees should include the DTSA-mandated notice in all non-disclosure agreements, namely that employees will not be held liable for disclosing a trade secret either (i) in confidence to a government official or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law; or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

By following these measures and ensuring separation agreements are carefully drafted and regularly updated, the process of parting ways with an employee can be less painful.