A Brief Introduction of Employment Separation Agreement
What is a separation agreement in employment? Employment separation agreement includes the terms and conditions under which an employee might be terminated. The employee cannot take any action against the employer on account of wrongful termination if they enter this agreement. They cannot claim any extra severance pay either, apart from what is mentioned in the employment contract. This agreement can be used by the employer when firing an employee or laying them off.
The two essential components of employment separation agreements are:
- Waiving the claim by the employee: There is a general waiver of all claims which are related to employment. This would include employment law claims, legal expenses, compensation claims or claims related to employment discrimination
- Fee for a waiver: The employer pays a fee to the employee for waiving the claims
Some of the other components of such agreements are the specified items of the company, which must be returned by the employee before the date of termination, severance pay which would be payable, a non-disparagement clause, and a non-compete clause.
In a non-disparagement clause, the employee has restrictions about what they can say about the company post their termination. In a non-compete clause, the employee cannot start a similar business or join a competitor for a specified period of time.
Who Takes the Employment Separation Agreement?
Employment separation agreements entered between an employer and an employee. The employer requires mutual separation agreement, so that there are no additional claims made by the employee when employment is terminated.
Employees need to sign this agreement to assure the employer that they are agreeable to the terms laid down regarding waiving of claims against the employer if they are laid off.
Purpose of Employment Separation Agreement
Employment separation agreements are required by employers to protect themselves from legal action taken by employees. The objective of such agreements is to ensure an amicable end to a working relationship between the employer and the employee. The employee has no binding claims against the employer.
During the course of employment, the employee has access to confidential information which is the property of the employer. This agreement ensures that the employee does not share this information with a third party for financial gain.
To ensure that the employee does not work for a competitor and cause the employer financial losses, Severance agreement has a non-compete clause. This specifies that the employee cannot start their own business or join a competitor up to a certain period. The agreement contains the severance package payable to the employee, and the employee is not entitled to any additional pay in excess of this package.
Contents of Employment Separation Agreement
Employment Separation Agreements would contain all the details of the waivers made by the employee with regard to the termination of employment.
A standard agreement would include :
- The names of the parties to the agreement, the employer and the employee
- The effective date of the agreement
- The start and the end date of the agreement
- The reason for the separation is clearly stated, whether it is termination, resignation or layoff
- The details of the severance package offered to the employee; there could be benefits instead of cash. The package would also depend on the reason for termination.
- The mode of payment: There could be a lump sum payment or installments over a certain period
How to Draft Employment Separation Agreement?
An employment separation agreement template can be referred to while drafting employment separation form.
The points which should be considered are:
- Eligibility to contract: You need to determine if both parties are competent to contract. They should be over the age of 18, of sound mind and not under the influence of drugs. There should be no coercion used by either party.
- The consideration payable: The severance pay which the employee is entitled to, and the fee payable for signing the contract should be mentioned. The mode of payment of the severance package should also be included.
- Terms of the contract: The contract should not favor either the employer or the employee; it should be fair to both parties.
- Confidentiality clause: The employee should not share confidential data related to the company with any third party. Breach of this clause leads to a penalty.
- Dispute resolution clause: The method of resolution of any dispute should be part of the contract. Whether the parties use litigation or arbitration, the sharing of legal expenses, and the jurisdiction of the resolution.
Since this agreement requires the employee to waive any claims against the company in the event of dismissal or termination of employment, the employee can negotiate higher pay with the employer. Since the employer can dismiss the employee without any claims from them, higher pay could be acceptable to them. Both parties should agree to pay, and then the agreement can be signed.
Benefits and Drawbacks of Employment Separation Agreement
The benefits are:
- Protection of interest: The interest of the employer and employee are protected. The employee cannot make any claims against the employer in case of termination. The employee is entitled to severance pay when employment is terminated.
- Protection of confidential information: The non-disparagement clause ensures that the employee cannot share proprietary information with a third party or talk about the company.
- No threat of the employee joining a competitor and causing loss of revenue due to the non-compete clause.
The drawbacks are:
- Claims by employees: In the absence of this agreement, the employees can make claims to the company if they are laid off, and the company will have to compensate them
- Threat from competitors: The employees can join the competitors of the employer and share information leading to losses for their previous employer
What Happens in Case of Violation
In case of breach of such separation agreement form, the employer can take legal action against the employee. If the employee joins a competitor and causes loss of profits, then the employer can claim monetary damages, including loss of profits.
If it is found that the employee has caused financial losses to the employer while in employment, then under restitution(1), the employee will have to restore the employer to the position before the contract was signed by returning the money and property.
If the contract was entered into by fraud, then it will either be canceled under rescission or a new contract drawn under reformation. If the contract period is at an advanced stage, then compensation will not be accepted, and the party violating the contract has to fulfill it.
Employment separation agreements help employers protect their confidential data and against claims made by employees whose services have been terminated. It is very important for both parties to the contract to read all the terms and conditions carefully before signing the agreement.