Terminating Employees is Hard – Defending Your Severance Agreement in Court is Harder: Ensure Your Separation and Release of Claims Agreements are on Solid Legal Ground.

So the time has finally come.  The employee you hired two years ago that held so much promise is showing up late to work, does not contribute in meetings, makes critical errors and is not responding to improvement plans.  Despite your best intentions to rehabilitate this employee, it’s just not working out. 

Your documentation of all issues throughout the employee’s tenure exists, is clear and convincing.  You have planned the termination meeting carefully as to timing, personnel and the statement you will provide.  You plan to offer the employee a severance and know you need him to sign off on your standard separation and release of claims agreement.  You’ve used the same separation agreement for the last 10 employee terminations without issue, so what could be the problem now.  You insert the severance amount into the document, print it out for the meeting, and don’t give it another thought. 

What could possibly go wrong here?  Unfortunately several things, the least of which is the termination meeting you are most likely fretting about.  Without a recent and thorough review of that separation agreement, are you sure that all claims are being waived?  Are you confident that you are providing the employee with enough time to consider whether they want to sign the agreement?  Is that agreement written in Courier New font from a typewriter in 1985?  What if having the departing employee sign the agreement isn’t worth the dusty, yellowed paper it’s written on?  After all the careful termination planning and documentation, signed separation agreements do get challenged in court.

Take the recent case of Ehresman v. Hershey Company (yes, that Hershey).  In that case, an attorney working for The Hershey Company claimed that he was terminated due to his race, color, gender and age.  Although the plaintiff had signed a separation and release of claims agreement and accepted the severance payment, he nonetheless claimed that he was fraudulently induced into signing the agreement and so it was invalid.  The federal court in this case reviewed the agreement and provided some much appreciated guidance to employers and employment lawyers everywhere by expounding seven factors that led the court to decide the separation and release of claims agreement was valid and enforceable against the plaintiff.  The factors are as follows:

1.       The court found that the language in the agreement was clear, specific and the list of claims the plaintiff was waiving was unambiguous.  Be sure in drafting separation agreements that you use plain language as much as possible and avoid lengthy, legalese-ridden agreements that a layman would not understand.

2.       The court also concluded that Hershey did the right thing by allowing the plaintiff ample time to consider the agreement before signing.  Remember, if an employee is over the age of 40, you must provide at least 21 days to review the agreement prior to signing.  If your company is conducting a RIF, you must allow additional time – up to 45 days.

3.       Another win for the employer?  The court found that the plaintiff, being a lawyer and all, understood his options when he agreed to the terms of the agreement and executed it.  Notwithstanding his profession, the court held that the employer’s agreement provided a fair explanation of what the plaintiff was giving up in return for signing.  This is another reason to ensure your documents are drafted using clear, unambiguous plain language.

4.       Plaintiff in this case was encouraged to seek outside legal counsel to advise him on the pros and cons of signing the separation agreement.  This was evidenced in the very language of the agreement itself.  In addition to being a best practice, the ADEA requires that separation agreements give employees notice of their right to consult with an attorney before signing.  The court found that the employer’s encouragement for the employee to consult with a lawyer gave more weight to the employer’s argument that plaintiff entered into this contract with eyes wide open, fully understanding what he was doing. 

5.       Another factor that weighed in the employer’s favor is the fact that plaintiff was given the opportunity to negotiate the terms prior to executing the agreement.  The best way to ensure departing employees are afforded this opportunity is to give all employees, regardless of age, time to review the agreement and encouragement to seek outside counsel assistance.

6.       The court found that plaintiff’s receipt of a severance payment, which he would not have been entitled to ordinarily, provided adequate consideration to sign the separation agreement.  This brings up an oldie but goodie principle from contract law.  A contract is invalid unless it has three components: an offer, acceptance and consideration.  With a separation agreement, the consideration is typically a severance payment.  However, consideration can also come in the form of job replacement benefits or employer agreement to pay the employee’s COBRA coverage for a period of time.  Ensure that you are giving your departing employee something in exchange for signing your separation agreement, which Hershey did in this case.

7.       Another oldie but goodie principle lawyers learn in law school is the importance of boilerplate language.  Boilerplate are those miscellaneous provisions at the end of a contract that can be tempting to overlook, but are oh so important.  In this case, Hershey’s separation agreement contained one important piece of boilerplate language: an integration clause.  Integration clauses state that the writing is meant to represent the parties’ entire agreement and thereby expresses all the parties’ negotiations, conversations, and agreements made prior to its execution.  Here, the plaintiff was trying to argue that he was tricked into signing the agreement when the employer made false promises.  However, the integration clause stated that the agreement was evidence of the entire agreement between the parties so the plaintiff’s argument faltered quickly.  Be sure you have integration clauses in all of your separation agreements and that the agreement between both parties is fully contained within the four corners of that agreement. 

As you read through this list of seven factors, if you are uncertain about whether your separation agreement is up to snuff, myHRcounsel provides you with access to licensed employment law attorneys on a flat monthly fee basis to consult with you and draft you a legally compliant and defensible separation agreement.  If you are scratching your head wondering whether you even have a separation agreement, it is crucial that you consider adding myHRcounsel’s services to implement a legally compliant separation agreement and put termination procedures in place before you end up in the hot seat.