In employment law, a separation agreement is a written contract between an employer and a worker who is about to be terminated. The agreement generally requires the worker to waive all legal claims that he or she may have against the company. In exchange, the worker receives severance pay.
Many agreements also restrict what the worker can do after the termination. There are situations where it is not advisable to sign a severance agreement.
Is an employee separation agreement a binding contract?
Yes, a separation agreement is a binding contract. It is formed between an employer and an employee who is about to be terminated. The employer offers a severance package. In order to receive it, though, the employee has to give up certain rights against the employer.
To be a binding contract, there must be:
- an offer,
- an acceptance of that offer, and
- an agreed-upon exchange of value by each party, known as “consideration.”1
By creating and submitting the separation agreement, your employer is making the offer. By signing it, you are accepting that offer. Because you and your employer are both giving something up in the exchange, there is consideration:
- your employer gives up money or the other benefits in the severance package, and
- you give up your legal rights to file a lawsuit against the company.
However, all contracts must be for a lawful purpose. If the contract would break the law, it is a void contract.2
Separation agreements can be void if they would force you to relinquish certain rights that you cannot legally give up. By trying to get you to give these rights up, the agreement would violate the law. However, if an unlawful provision in the separation agreement would be void and unenforceable, the rest of the agreement may still stand without it.
Because some employers may not be concerned by a potential lawsuit, not all terminations involve a separation agreement. Even when employers are unconcerned about a lawsuit, though, they may still offer severance in order to protect their reputation. This is most common if the employee was laid off or if the employee’s termination was due to downsizing.
What rights does it require workers to relinquish?
Not all separation agreements are the same. Employers often change the terms in the agreement based on their needs and concerns. However, some common rights that workers have to give up in order to receive the severance package are claims concerning:
- wrongful termination,
- class action lawsuits,
- family leave claims under the Family and Medical Leave Act (FMLA),
- retirement benefits disputes under the Employee Retirement Income Security Act (ERISA),
- the continuation of healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA),
- disability claims against the employer, and
- other potential claims that are not known at the time of signing the separation agreement.
The details about the employee’s rights that he or she is relinquishing are laid out in the waiver of claims section of the severance agreement. This section may also be titled “release of claims.”
If you sign a separation agreement that waives these rights, you cannot invoke them later on. If you try to bring a claim that you had waived in the agreement, your lawsuit will be dismissed. You may have to cover the employer’s attorney’s fees and the costs of defending against your claim, as well.
However, some of these waivers may not be all-encompassing. For example, you can legally waive your right to file a lawsuit for workplace discrimination under Title VII, but not your right to file a discrimination charge with the Equal Employment Opportunity Commission (EEOC).
Additionally, while you may waive your anti-discrimination rights under federal law, similar state law claims may survive. For example, in California, you can waive your right to be in a class action lawsuit against your former employer. However, your rights to sue your former employer in a class action under the Private Attorney General Act (PAGA) will survive this waiver.
Are there any rights that cannot be waived in a separation agreement?
Some of your workplace rights cannot be waived in a separation agreement. Some of these rights include:
- workers’ compensation claims and benefits,
- unemployment benefits, and
- your right to wages or compensation that you were already entitled to receive, including overtime pay or disputed minimum wage benefits.
Additionally, you can only waive your rights to file an age discrimination claim under the Age Discrimination in Employment Act (ADEA) if you do so knowingly and voluntarily. Under the Older Workers Benefit Protection Act (OWBPA), in order to be a knowing and voluntary waiver, the following requirements must be met:
- the waiver is in clear and unambiguous language and specifically refers to your rights under the ADEA,
- the waiver does not affect claims that can arise after the agreement is signed,
- you receive something of value that you were not already entitled to in exchange for your waiver,
- you are advised by your employer, in writing, to consult with legal counsel before signing the separation agreement,
- you are given at least 21 days to consider whether to waive your ADEA rights, or 45 days if it is a part of a mass layoff, and
- you also receive at least 7 days to revoke your waiver, once it was given.3
If you signed a separation agreement in which you agreed to waive one of these rights that cannot legally be waived, that portion of the agreement will not be enforced by courts. If you waived them and then invoke these rights later on, the court will ignore the waiver. However, most separation agreements include a severability provision. This provision states that, if one part of the agreement is found to be unenforceable, it is severed from the rest of the contract. The remainder of the agreement can still be enforced.
What are some common post-termination restrictions on departing workers?
In addition to a provision where you waive your rights to sue your former employer, employment separation agreements also tend to include other post-termination restrictions on your conduct. Also known as restrictive covenants, some of the most common are:
- a non-compete clause or agreement,
- non-disclosure agreements, especially if you had access to your employer’s trade secrets or sensitive intellectual property,
- a confidentiality clause,
- a non-disparagement clause, and
- a non-solicitation agreement that covers your former employer’s clients, customers, and other employees.
The separation agreement will also include details about the employer’s remedies, should you violate one of these post-termination restrictions.
Just because a restrictive covenant is in the severance agreement, though, does not mean that it will always be enforceable. Many states have strict laws about how prior employers can control former employees after they have left the company. In California, for example, non-compete agreements are unenforceable.4 Nevertheless, many employers still include them in their employment contracts in an attempt to control their former employees.
What is in the severance package?
The benefits included in the severance package can include a wide variety of types of compensation. Some common things that employers include are:
- a lump sum payment,
- the continued payment of full or partial paychecks for a set amount of time, often based on the length of the employee’s employment,
- stock options,
- compensation for any unused vacation, personal, or sick leave,
- continued health insurance, often for a set amount of time or until you find a new job, and/or
- paid job counseling or training.
However, there are no legal obligations for what has to be in a severance package. In many cases, terminated employees can negotiate their severance. Especially if you have serious financial concerns from losing your job and have leverage against your employer, you may want to negotiate for better terms.
Because the severance payment is paid in exchange for you signing the separation agreement, it does not affect your eligibility for unemployment benefits.
What can happen if a severance agreement is not used?
If there is no severance or separation agreement, you will have rights to sue your employer for any misconduct that happened during your time in their service. This can include lawsuits for:
- wrongful termination,
- workplace harassment, including sexual harassment,
- discrimination, or
- workplace retaliation.
These concerns often push employers to use separation agreements for employees who are leaving the company after a contentious time.
- See generally Donovan v. RRL Corp., 26 Cal.4th 261 (2001) and California Civil Code 1550 CIV.
- R.M. Sherman Co. v. W.R. Thomason, Inc., 191 Cal.App.3d 559 (1987).
- 29 USC 626(f)(1).
- California Business and Professions Code 16600 BPC.