Having an employee sign a separation agreement upon ending the employment relationship amounts to a form of insurance that he or she will not later take legal action against your company, based on the termination. Whether a separation was friendly (for example, due only to a reorganization or downsizing), or unfriendly, an agreement could prove worthwhile.

Suppose your company downsized. After a few weeks of unemployment, even an ex-employee who seemed understanding during the termination process may conjure up reasons why a court may see the downsizing as unjust. There’s a raft of possible claims ex-employees could make if the goal is just to get you to settle instead of paying the costs to fight the case.

Employees aren’t obliged to sign such agreements, but can be motivated to do so by, for example, a lump-sum payout or agreement to pay the employer share of the person’s health care benefits for a fixed period of time.

Bases for Litigation

Here’s a partial list of claims for which an ex-employee might decide to sue your company, even if from your perspective, the claims lack merit:

• Discrimination. In addition to the familiar discrimination categories banned by the U.S. Civil Rights Act (age, sex, race, color, national origin, religion, pregnancy, disability and veteran status), several states have added categories such as marital status, arrest record and sexual orientation.
• Breach of covenant of good faith and fair dealing. Proving this would be a steep uphill climb in most jurisdictions, but a former employee might get it to stick.
• Termination in violation of public policy. Although unusual, cases have been brought in which employees claim they were fired for doing things that created problems for the employer, but nevertheless were consistent with their states’ policies with regard to that issue. Examples might include preventing environmental damage and even cruelty to animals.
• Breach of contract. This is only applicable if the employee had an employment contract to begin with that didn’t clearly address all termination scenarios.

The most fundamental provision of a separation agreement requires the employee to release you from any future legal claims. Another key component is an antidisparagement clause, prohibiting the employee from bad-mouthing you publicly. This should be reciprocal, however, barring you from doing the same, to balance it out.

Agreement Provisions

The agreement should also require that:

• Confidentiality is maintained with respect to the agreement, except when the communication is with the employee’s spouse, accountant or attorney,
• Company-owned property in the possession of the employee is returned,
• The employer won’t attempt to block the departing employee from seeking unemployment compensation,
• The employee will be paid for any as yet unpaid, accrued compensation, such as bonuses or commissions, net of any employee debts to you such as having taken excessive vacation days, and
• The employee receives a description of the compensation you’re offering him or her (if any), as an inducement to sign the agreement.

Another provision to consider is one stating that the employee cannot be rehired. On one hand, you might prefer to keep your options open by not including such a provision — particularly if the individual was a good worker. On the other hand, this provision makes it crystal clear that the termination is final, and that there can be no hint that you have implied any promises to the contrary.

As noted earlier, employees are under no obligation to sign these agreements, nor is your company obligated to offer similar agreements to other employees.

What’s It Worth?

An employee might refuse to sign an agreement, even when a financial reward for doing so is on the table. In that case, you’ll just need to decide whether to raise your offer or drop it altogether. One way to encourage a swift resolution of the matter is to put a time limit on your offer, so the employee cannot allow the process to drag out.

However, if the employee is at least 40 years old, be aware that the Older Workers Benefit Protection Act requires your company to give him or her time to decide on a course of action. That is, you must allow at least 21 days to sign or not sign, and then another seven days to rescind a decision to accept the agreement.

An employee’s reluctance to sign a separation agreement could be an indication that he or she is mulling the possibility of pursuing a legal claim. Still, if you’re confident there’s no possible valid claim, you may not want to succumb to what could be a veiled threat.

Simplicity Is Best

It’s advisable to keep agreements as short as possible. For example, if you incorporate other provisions such as prohibiting the employee from going to work for a competitor, that could create issues because non-compete agreements are generally hard to enforce. In California, non-competes are banned altogether.

For the same reason, be sure to have a labor attorney review a prospective agreement for enforceability before presenting it to a departing employee. Keep in mind that, though you can find fill-in-the-blank separation agreements online, they might not be fully enforceable in your state. State requirements vary and are sometimes stricter than federal requirements.