It is often prudent for Maryland employers to utilize separation agreements with departing employees. Typically, the incentive for the employer is that it receives a written release from the employee as to almost any legal claim the employee might otherwise have the right to assert. In exchange, the departing employee receives certain benefits defined by the agreement. While each case is unique and involves individual considerations, we advise our clients to consider the following issues in all scenarios involving separation agreements.
Compensation: For a release to be enforceable, the employer must provide the departing employee with some additional benefit beyond what the employee already was entitled to receive (called “consideration”). A separation agreement should clearly identify and define all of the wages and benefits to be provided, and should specify that these benefits exceed those to which the employee already is entitled. In addition, the agreement should state that the amount to be paid will be “less all lawful deductions” to account for payroll tax withholdings. The agreement should also provide the manner in which the payment will be made (for example, direct deposit via regular payroll, a separate check, etc.), and the timing of such payment in order to avoid any confusion.
General Release and Waiver of Claims: From an employer’s perspective, this is the critical factor and an area where it is often crucial that management receive appropriate legal guidance. Releases are tricky for many reasons. While most employment claims (or potential claims) may be released, some may not. Legal guidance on this point is very important. Moreover, some employment law claims must be specifically mentioned for the release to be effective (such as federal age discrimination claims under the ADEA). While being specific, however, the release also should be broad; it should include a “general release” of all claims accruing through the date of the release and not be limited only to the specific claims identified. Finally, it is essential to identify the individuals and entities being released very broadly. Many Maryland employment law claims may be brought not only against the company, but also against certain individuals in management. A proper release should include all of these people, as well as any successors and assigns of the company itself. For all these reasons, employers must receive competent legal counsel to ensure that their releases and waivers are enforceable.
Post Employment Cooperation: It often arises that a departing employee is the only individual in the organization with knowledge of certain issues (for example, a network system administrator or a high ranking member of management). Ideally, an employer will fully debrief the employee prior to his or her departure and have a succession plan in place several months prior to the employee’s last day. However, since this is rarely possible, the employer will want to reserve the right to continue communicating with the former employee and even retain the ability to assign certain tasks to him or her after the employment relationship has ended. When this is the case, the terms of the employee’s post-employment assistance must be carefully detailed in the separation agreement.
Confidentiality: Typically, an employer will want the terms of the separation agreement to remain confidential. In order to do so, the agreement must expressly set forth this requirement. However, it is not always practical for all details of the agreement to remain under seal; accordingly, the agreement may need to identify certain permitted exceptions to confidentiality (for example, conversations between employees and their tax consultants, immediate family members, attorneys, etc.). In addition, to the extent it is expected that others will inquire with the employee about the separation agreement, it may be appropriate to include a provision expressly stating what the employee is permitted to say in response (for example, when there is an inquiry about the agreement, an employer may want to specify that the employee respond by stating, “the issue has been satisfactorily resolved by agreement, and the terms are confidential.”)
Details Relating to Separation: While the agreement should typically state the employee’s last day of employment, there are varying considerations which must be evaluated in determining whether anything beyond that is provided. In some instances, the employer may be well advised to identify the specific basis for the employee’s separation (for example, resignation, termination, reduction in workforce, etc.). However, in other situations, it may be to the employer’s advantage to only state that the individual’s employment has concluded. One factor that is likely to affect this decision is whether the employer intends to contest unemployment benefits.
Nondisparagement: After providing an employee with a generous sum of money in exchange for the employee’s separation, the last thing the employer wants is for the employee to subsequently turn to the internet and publish derogatory remarks about his or her former boss. Accordingly, it can be beneficial for the employer to include terms describing what the employee is permitted, and prohibited, from saying about his or her past employment and any details surrounding the separation. Issues in this area also often arise in relation to an employee interviewing with their next place of employment. However, there can be legal limitations on the extent to which the employer can restrict the employee and, as such, an employer would be wise to seek out appropriate legal counsel in this regard.
Dispute Resolution: While employers enter into separation agreements as a prophylactic measure in order to minimize future litigation, the terms of the agreements themselves can also lead to disputes (for example, allegations as to a breach of confidentiality, violations of the nondisparagement obligations, etc.). For this reason, the parties to the agreement often agree to have such disputes resolved via arbitration. In other situations, the agreement may provide for disputes to be heard in a particular court (for example, state versus federal court). Irrespective of how the parties ultimately agree to resolve any potential future issues, employers want to be certain that the agreement clearly states the manner in which such disputes will be resolved.
References: If the terms of the separation agreement provide that the employer will provide the employee with a reference, an employer should consider putting the reference in writing and attaching it as a non-confidential exhibit to the agreement (for example, a letter of recommendation which the employee can use in seeking new employment). Alternatively, the parties may make an agreement limiting the information that can be communicated by specifying to whom the person seeking the reference will be referred and the type of information that can be released (for example, dates of employment, starting and ending salary, etc.)
Additional topics employers may need to address include the return of company property, a liquidated damages provision for breach of the agreement, non-competes, and terms addressing any of the employer’s potential trade secrets or proprietary information. Ultimately, when a separation agreement is drafted properly, it serves as a wise investment for the employer in safeguarding its business. But in order to maximize an employer’s return on investment, the agreement must be carefully prepared and take into consideration the unique circumstances of each individual situation. Employees who are asked to sign employment releases are well-advised to have an employment attorney review the proposed agreement since a poorly-drafted agreement may not be enforceable. An employer’s worst nightmare – and a former employee’s best scenario – is the payment of severance money to an employee who ends up NOT being bound by an unenforceable separation agreement. Parties must proceed with caution and proper guidance.
Employers or employees who have any additional questions about separation agreements, releases, or any other issues that might arise in the workplace are welcome to contact Maryland workplace attorney Judd G. Millman. Mr. Millman is licensed to practice law in both Maryland and Texas, and his practice focuses exclusively on employment law. He regularly counsels both employees and employers on the myriad of legal issues which arise in the workplace. He can be reached directly at (410) 522-1020, or at firstname.lastname@example.org.