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Employee Separation Agreements: 5 Issues Employers and Employees Must Consider

Cole Law Group, PC

When an employee departs from a company either voluntarily or involuntarily, the parties often agree to enter into a separation agreement whereupon the employer pays the employee an amount of severance pay in exchange for a release of legal claims against the employer.

On the one hand a separation agreement can be a fair and amicable way to end an employment relationship. It benefits the departing employee who receives some form of compensation. It also gives the employer peace of mind because the agreement, if written concisely and in detail, will greatly reduce the likelihood of post termination lawsuits.

However, on the other hand, upon signing a separation agreement, an employee may be waiving or resolving valuable claims for substantially less than what he or she is owed. Alternatively, an employer who has entered into an employee separation agreement without legal counsel might find that the separation agreement resulted in   severance compensation for the employee that was unnecessarily generous.

I often consult and represent clients who either voluntarily or involuntarily end their employment and subsequently receive a severance or separation agreement. Below are five (5) considerations all parties should take into account before entering into a Separation and Release Agreement:

  • Employee’s Employment Status
    1. In Tennessee, most employees are considered “at-will” meaning that generally they can be fired at any time for any nondiscriminatory reason. Therefore, the general rule is that employees are not entitled to receive any sort of severance or separation pay.
    2. It is important for employees and employers alike to ascertain the classification of the status of each employee and the potential benefits that are associated with each classification.
  • Employee Benefits
    1. If an individual has an employment agreement with their employer, then that person may not be considered an “at-will” employee, but an employee with certain benefits and protections. An employee may also be entitled to receive additional benefits depending on whether separation from the Company was voluntary, for cause, or without cause.
    2. Individuals can also be “at-will” employees and still be entitled to certain benefits. For example, an employee may receive commissions as a salesperson, an annual performance bonus, be entitled to recover unpaid time off, or be legally entitled to benefits under the Fair Labor Standards Act or Americans with Disabilities Act. Many times these additional benefits are contained in employment agreements, offer letters, or in the Employment Handbook.
  • Potential claims Against the Employer.
    1. Depending on the factors surrounding an employee’s termination, the employee could have certain claims against the Company. For example, if the Company refuses to compensate a salesperson for unpaid commissions, the salesperson may have a breach of contract claim against the Company.
    2. Furthermore, if an employee is terminated for what that individual alleges is an unlawful reason for termination, such as discrimination, then the employee may have a meritorious legal claim against the Company.
    3. It can be beneficial for employers to spot these issues prior to the termination of an employee so the matter is resolved amicably rather than after costly litigation.
  • Restrictive Covenants
    1. It is very important for employees to understand and review all clauses contained in a severance or separation agreement. Employers will often include restrictions on an employee’s ability to work that may include a non-competition or non-solicitation agreement.
    2. It is also important for employers to consider adding restrictive covenants to Employee Separation Agreements in order to protect company trade secrets and prevent unfair competition.
  •    Employment Litigation

Employment litigation can have unintended consequences for both employees and employers. For employees, employment litigation can be a long process that may inadvertently impact their ability to procure a new job. For employers, it may make economic sense to resolve meritorious claims earlier in litigation rather than fund a costly defense.

Both employers and employees should seek experienced legal counsel before entering into an employee separation agreement. If you would like documents reviewed and require legal assistance, please call Cole Law Group at 615-490-6020 for an appointment with one of our business lawyers in Brentwood. We will be happy to assist you.

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