Ten Tenents of Executive Separation Agreements
Updated: Jan 28, 2020
Ten Tenants of Executive Separation (or Severance) Agreements.
The following provides ten areas that warrant your attention when reviewing your separation agreement, or drafting one for an employee who you’ve agreed to provide a severance (due to issues of leverage or contractual agreement). While it is not an exhaustive list, it does cover most of the basics.
1. Release Language and Exceptions from the Release. Let’s face it, release language is usually copied from one agreement to the next without much thought as to what is actually stated in the release. With recent changes in employment laws, it’s best to carefully review the release language to make sure that what a company is expecting to be released actually is released, and nothing that is not permitted to be released by law is released. For example, releases often include any and all claims related to the executive’s employment “from the beginning of the world to the date of the release.” Does the release include a release of any equity rights, including those that were granted during the executive’s employment, as compensation for his employment? In some states, a release is separate and apart from a covenant not to sue, and the distinction may apply to specific types of claims. It is imperative, therefore, that the executive not only release claims, but also provide a covenant not to sue the company for any released claims. Recent cases under the Fair Labor Standards Act, the Family and Medical Leave Act, the Florida’s Labor laws, and the federal and state discrimination laws also require certain.carve-outs from the release as well as limitations to release certain class actions or collective actions.
2. Taxation & Deductions. The IRS provides a publication located here: https://www.irs.gov/pub/irs-pdf/p4128.pdf , that goes into the aspects of termination and job loss, along with the taxation of severance / separation agreements. How your severance is categorized, when it is disbursed, how it is disbursed, and whether the taxes are withheld can have significant impact financial impact.
3. Confidentiality & Disparagement. When employee part from a company one of the most pressing concerns for that company is the reprisal or retaliation of the employee for being terminated. As a condition to the separation agreement (and consideration contained therein), a company will require an individual refrain from discussing the company in public, or that such communications or public statements refrain from painting the company in a negative light.
4. Restrictive Covenants. Chances are there was a section in your employment agreement that where you pledged: non-competition, non-solicitation, non-disparagement, non-disclosure, and other commitments.
5. Trade Secrets. Whether or not you signed a non-compete, a company may be entitled to protect their trade secrets from falling into the hands of competitors, especially if an employee becomes a competitor. Your separation agreement may have terms and conditions regarding the exposure and discussion of trade secrets. Fla. Stat. Chpt. 688 goes over what is and is not considered a “trade secret”, and how such be misappropriated. Trade secrets are defined as:
“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process that: (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
6. Earned Compensation. As part of some executive compensation packages, employees are entitled to cash incentive compensation. Because any differences as to what was and was not earned by the executive may give rise to claims under wage laws, including a term in a separation agreement stating that (a) there is a dispute, and (b) the parties wish to resolve their dispute without resorting to litigation by compromising and agreeing to a fixed payment, is advisable. Another related issue is the timing of any earned compensation. In many states, the last day of employment is the trigger for payment of earned compensation. So, although there may be a dispute as to what was or was not earned, it may be worth considering an earlier payment of this portion of the separation benefit to avoid possible claims.
7. Severance. Although it would seem that this would be the focus of a separation agreement, a surprising number of separation agreement forms that I have seen fail to address the form of the severance, i.e. lump sum or payment over time and type of currency; when severance commences; and who is responsible for paying it (where, for instance, there is a change of control of the company). The failure to specify the amount, the timing of payment, and currency could trigger potential tax liability under the Internal Revenue Code, among other things. Similarly, commencing payment without considering the timing requirements for a valid release and waiver of age discrimination claims, or other contingencies, may result in inadvertently handing an executive cash to use for her attorneys’ fees in a litigation against the company for employment-based claims.
8. Other Benefits. Although executive separations are the quintessential example of when “cash is king,” too often the value of non-cash severance benefits is underestimated. To an executive, continuation of health insurance benefits, a letter of recommendation or introduction to a contact for his next potential opportunity, the ability to keep computer equipment or a mobile phone number, or executive outplacement services can be of significant value and can bridge the gap between the cash that an executive may be demanding and the cash that a company is willing to provide.
9. Termination Date. It is not unusual for there to be some period between the date an executive is notified of her termination and the actual date that the executive departs from the company. If the termination date is set well after the notice date, the company may want to consider whether or not it expects the executive to be performing any services for the company, among other things. Also, there may be considerations related to vesting of equity or retirement benefits that may warrant a later termination date, even if the company no longer wants or needs the executive to be actively engaged in the business.
10. Company Property. This issue often surrounds the use of a company computer, as many employees take their devices home for work. There could also be a company cell or vehicle that was part of the arrangement. The usual and immediate concern that employees share is the access to their private data that may be on the device. The first rule is to not conduct any private activities on company property, but in some instances that is not possible. While you may make attempts to purge the device of your private info, understand that the contacts and messages may be considered company property, and you destroying them can result in actions from the Company.
If you would like assistance in reviewing or drafting a separation / severance agreement, contact us at email@example.com.