Separation Agreement or No Separation Agreement?

13 August 2012 Labor & Employment Law Perspectives Blog

When an employer terminates an employee, it has to decide whether to offer the employee separation pay (severance) in return for a release of claims. (See previous Legal News: Employment Law Weekly Update, May 29, 2012). Employers are generally not legally required to provide separation pay. Some employers choose never to offer separation pay, or to do so only in very limited circumstances. For many employers, though, offering separation pay is almost the default position — they offer separation pay almost as a matter of course to terminated employees. This is no doubt driven in part by a desire to avoid the risk and expense of employment lawsuits. But, is it the right approach? After all, most terminated employees do not file lawsuits, and if an employer offers separation pay to all of them, it will be paying separation pay to a great many individuals who would never have pursued litigation.Instead of presuming separation pay is appropriate in most or all situations, consider a more nuanced analysis using these guidelines as a starting point:

1. Is separation pay required in a particular situation because of an employment contract or policy. If so, consider paying the separation pay. Failure to do so may give rise to claims under the applicable state wage payment law.

2. Was the employee terminated for misconduct? If so, in most cases, consider foregoing pay separation pay.

3. Was the employee terminated for performance reasons? In these situations, consider offering separation pay on a case-by-case basis depending on the circumstances, such as:

  • How bad was the performance?
  • Is this a “high-risk” termination for some reason? For example, did we fail to give the proper counseling? Do we have poor documentation? Are we treating this employee more harshly than other employees in similar circumstances? Did the employee recently make a harassment or whistleblowing complaint?
  • What was the employee’s length of service? Employers generally do not pay separation pay to short service employees unless it is a high-risk situation for other reasons. Be more willing to consider separation pay for long service employees either because: a) terminating a long service employee for performance reasons carries, in many cases, greater legal risk, or b) simply because it is the “right” thing to do for the long service employee.

4. Was the employee terminated in a reduction in force? If so, consider offering separation pay as a matter of policy, for two reasons: a) the employee is usually being terminated through no fault of his/her own (again, the fairness issue) and b) reductions in force pose greater legal risk for employers than individual terminations due to lawsuits arising out of reductions potentially involve multiple employees.

Separation pay in return for a release can be a great tool for employers in avoiding legal risk. However, it should be implemented wisely; consider whether it makes good business sense under the circumstances.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services