When your business parts ways with an employee, is your company —and those who work there — protected from a lawsuit? Without an employee separation agreement and release in place, an employee can make a variety of claims, including pursuing a civil action in court or administrative action through the Equal Employment Opportunity Commission or similar state agency. An employee can walk out the door with your trade secrets and key customers, taking them to a competitor — and even solicit valuable employees to join the other company.
“Every employer should consider an employee separation agreement and release, as no employer is immune from lawsuits and other employee claims,” says Michael J. Torchia, a member of Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Torchia about how employee separation agreements can protect employers and individuals, and what components these legal documents should include.
What is an employee separation agreement and release, and who needs one?
An employee separation agreement and release ensures that a company and its individuals — including officers, directors, shareholders and employees — are not liable should an employee file suit after leaving the company, whether through termination, layoff or resignation. This legal document always contains a release of all of the employee’s claims and may include noncompete, nonsolicitation, trade secret and confidentiality, and ‘return of company materials’ provisions to protect the employer from such damage.
An employer needs the peace of mind of knowing that a former employee cannot cause damage to the business or instigate lawsuits that could harm the business. Every business should consider putting an employee separation agreement and release in place.
Why is it critical to put an employee separation agreement and release in place?
Think of all employees as potential plaintiffs. Are you offering them severance pay or other benefits on the way out the door without asking for anything in return? Businesses could instead require that employees sign a separation and release agreement in return.
Some employers are hesitant to propose an employee separation agreement and release because they are concerned that asking employees to sign the document will be an admission that the company has done something wrong or that the company is trying to hide something. But this is rarely true. These agreements are common business practice, and most employees are not surprised if requested to sign a separation and release.
What key components should be included in an employee separation agreement and release?
First, the employer must give some sort of ‘consideration’ when asking an employee to sign a separation agreement and release. In other words, what will you give the employee in return for signing it? Many times, this consideration is severance pay.
For example, in Pennsylvania, employers are not required to pay severance unless they have already agreed to do so, such as in an employment agreement, established company policy or collective bargaining agreement. Therefore, if your company has not committed to paying severance, you can offer some amount of severance in exchange for the employee signing the agreement. Or, if you offer two weeks of severance, for example, you may extend that to six weeks if an employee signs the agreement.
Confidentiality is also important. You don’t want employees telling others in the company what they are receiving in return for signing.
It’s also a good idea to include an attorneys’ fees provision. Should a former employee violate the agreement and file a lawsuit against your organization, the agreement would require that employee to compensate you for attorneys’ fees to defend the action. This is an important component that also deters employees from breaching the agreement, and makes the employer whole if employee does breach.
Other key points of the employee separation agreement and release include noncompete, nonsolicitation, confidentiality and trade secret provisions. Also, an employer will want to include provisions that:
* Employees must return all company property and materials upon their departure.
* Designate jurisdiction and venue so that a lawsuit will be brought, if at all, in a place convenient to the company.
* The employees acknowledge that the employer may provide the agreement to prospective employers to enforce it.
Also, note there are different requirements depending on an employee’s age in terms of time frames for reviewing the agreement. The Age Discrimination in Employment Act gives employees ages 40 and older 21 days to review an employee separation agreement and release, and after signing, seven days to revoke it and change their minds. And if more than one employee is laid off, that timeline extends to 45 days, with a seven day revocation period. Additionally, there are laws that vary by state concerning how the agreements need to be drafted and what provisions they may contain.
What next steps should an employer take to protect the business and the interest of individuals who work there?
There is much more to include in an employee separation agreement and release. These are not cookie-cutter documents, which is why enlisting an experienced employment law attorney is critical.
Avoid using agreements downloaded from the Internet, and do not borrow an agreement from a fellow business owner. It’s also a bad idea to use an old agreement of your own because laws, statutes and court opinions interpreting these laws regularly change. Speak with an attorney about whether the agreement you are currently using is up to date and contains all the necessary provisions to protect the interests of the organization and its people.
Michael J. Torchia is a member of Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-2042 or [email protected].
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
