Whether employees are fired or voluntarily resign, they often leave their employer on rocky terms. In many cases, rather than face the possibility of a lawsuit or some other future conflict, the company and the employee will agree that it’s in their mutual best interests to enter into a separation agreement.
The basic structure of a separation agreement is that the company agrees to give something of value (consideration), typically in the form of a separation payment, to the employee in exchange for the employee making certain commitments to protect the company’s interests. One of the primary objectives of any separation agreement should be to protect company goodwill.
Your company’s goodwill consists of those intangible, hard-to-quantify things that make your company unique. All of these things add value to your company, but are either difficult or impossible for another company to duplicate. Examples are your company’s brand, reputation, employee relations, customer list, and supplier base.
This article discusses how to protect these valuable assets when an employee departs. Note that company valuations often also include the company’s confidential information and proprietary rights in the calculation of goodwill, which are discussed in Nolo's article, How to Protect Company Property in an Employee Separation Agreement.
Oftentimes, an employee learns valuable confidential information about a company’s business practices, customers, know-how, and strategies that could harm the company if that employee were to leave and work for a competing business. A non-competition clause (noncompete) is a standard provision in a separation agreement in which departing employees agrees that they will not compete with the business for an agreed-upon amount of time, within a specific geographic area. This includes working for a competitor or starting a competing business of their own.
One effective way to structure the noncompete is to:
Notwithstanding the natural tendency of a company to want the duration and geographic scope of the noncompete to be as onerous for the employee as possible, the law recognizes that it is in the public interest for people to be able to make a living. As such, each state has its own laws ensuring that noncompetes cannot be too long in duration or too unreasonable in geographic scope. See Nolo's article, Understanding Noncompete Agreements.
Often included with a noncompete, but sometimes overlooked, is a nonsolicitation provision (nonsolicit). The nonsolicit is often neglected because people frequently confuse the two, or assume that the noncompete adequately addresses the issues covered by the nonsolicit. However, the truth is that the noncompete and the nonsolicit work in tandem.
While the noncompete provides that the employee won’t work for a competing business, the nonsolicit prevents the employee from poaching your company’s customers, suppliers, employees, and other representatives. The nonsolicit is critical in protecting your business from either side of a competitive attack.
Employees may resign or be terminated for a number of reasons. The mere existence of a separation agreement indicates that the employee may be disgruntled and leaving on bad terms. Because the separation agreement is premised on the contractual requirement that the employee receive consideration for signing the separation agreement, it is in the company’s best interests to ensure that the employee can’t somehow damage the company’s name and reputation while also receiving the separation payment.
A non-disparagement clause provides that the employee will not make any disparaging statements, whether orally or in writing, about the company, and will not take any other actions that could somehow damage the company’s brand or any other aspects of its goodwill. The non-disparagement provision should also contain a representation that the employee hasn’t tarnished or bad-mouthed the company in any way prior to the date of the separation agreement.
These three restrictions (non-competition, non-solicitation, and non-disparagement) are called restrictive covenants because they restrain the employee’s future behavior. It is easier to control the employee’s adherence to these restrictive covenants if the company has not yet delivered the entirety of the consideration to the employee. For example, if the company is delivering the separation payment to the employee in installments, then the employee will have incentive to strictly comply with the restrictive covenants until the employee has been paid in full.
However, to protect itself from the inevitability of the employee having received the entirety of the separation consideration and no longer having any reason to comply with the agreement, the separation agreement must contain additional potential penalties for breach. Common among these ramifications are the company’s right to immediately demand the return of the full separation consideration (including any profits derived), issue a temporary or permanent injunction, sue the employee, and have the employee reimburse the company for any attorney’s fees incurred. Furthermore, the separation agreement should include a severability clause whereby the parties agree that if a court deems any of the restrictive covenants to be unenforceable, the court can modify the provision as minimally as possible to make the clause comply with the law.
Form more information, see Nolo's articles, Including a Bulletproof Release in Your Employee Separation Agreement and How to Protect Company Property in an Employee Separation Agreement.