Separately Assessing Separation Agreements

Separation or severance agreements —which typically provide a terminating employee with some kind of cash payment, temporary salary continuation, or other gratuitous benefit in exchange for a release of claims — have their usefulness in many circumstances. Employers often use them in connection with reductions in force, both as a means to cushion the blow for employees whose positions are eliminated and to minimize the risk of multiple claims. It may also make sense when an employer must terminate a problem employee for performance of behavioral reasons to consider offering the miscreant employee a separation agreement primarily as a way to mitigate risk. It also seems to be somewhat common in this start-up era that entrepreneurial companies, focused on product or platform development but (understandably) lacking in human resources know-how, believe they are required to provide separation benefits whenever employees depart — even in the case of a voluntary resignation — and do so in all circumstances based on that mistaken belief.

But from a “best practices” perspective, while some employers have a policy, or at least a practice, of providing separation benefits for all departing employees or when a given set of circumstances occur, we suggest taking a more nuanced approach. For example, as a general risk management practice, an employer might have a policy of paying one week of severance for every year of service whenever it involuntarily terminates an employee. But what if that same employer discovers a 20-year highly compensated employee — let’s say someone with a $160,000 salary — engaged in serious and indisputable misconduct, such as physically assaulting another employee or embezzling several hundred thousand dollars? Would it be wise to offer that individual over $61,000? What kind of messages might that send about how seriously the employer takes workplace misconduct or what it might be willing to pay for an employee terminated for far less egregious circumstances? And while risk mitigation is a good consideration, even if the employee files a bogus claim, because the employer is in a strong position to defend against it, is the employer better off using its resources to support its principles?

For these kinds of reasons, while we employer advocates usually preach consistency, the use of separation agreements may be better approached from an ad-hoc basis in the first instance. Only once the employer decides to offer a separation benefit should the focus then move to consistency of application. In other words, in Situation A where the employee has engaged in clear and well-documented misconduct, it may not make sense to offer any separation benefit at all. In Situation B, where the employee’s performance has been subpar but the employee has made good faith, albeit futile attempts to improve, or in Situation C where there is a problem employee whose behaviors have not been well documented, it probably makes more sense to offer a separation benefit. And if the employer decides to do so, at that point consistency becomes an important consideration, as it could raise questions why the employee in Situation B received two weeks’ severance for every year of service while the employee in Situation C only received one week for every year.

Certainly we do not disdain the use of separation agreements; they have valuable benefits in many circumstances. But other than in cases of reductions in force affecting multiple employees, employers should give some thought to why they might offer a separation benefit in a given circumstance, whether there is any meaningful risk to mitigate through a release, what the cost of obtaining that release would be, and whether the value of the release in that circumstance aligns with the costs of securing it.