When an employee leaves your company on sour terms, it can expose the company to certain liabilities. If, for example, the employee believes that he or she was treated unfairly, terminated improperly, or not adequately compensated, then any resentment felt by that employee could subject the company to a future lawsuit or some other form of retaliatory action.
Whether such action would be entirely frivolous or wholly warranted, both parties often recognize that it is in their mutual best interests to avoid future conflict by entering into a separation agreement in connection with the employee's departure. While a separation agreement can accomplish many important goals in protecting the company's interests (see Nolo's articles, How to Protect Your Company's Goodwill in an Employee Separation Agreement and How to Protect Company Property in an Employee Separation Agreement), the most vital objective is typically to shield the company from potential legal liability. This is accomplished through the inclusion of a precisely-drafted release provision in the separation agreement, together with related language that bolsters the intent and purpose of the release.
As with any contract, releases are only enforceable if value (consideration) is received by both parties. Typically, releases are structured such that the company delivers consideration to the employee which is usually in the form of a cash settlement payment, but which might also include compensation in the form of stock, stock options, promissory notes, or other items of value. In exchange, the employee grants the company a full and irrevocable release of any and all claims that it might have made against the company for any causes of action that could have arisen during the employee's tenure. Consideration is vital from a contractual perspective in order to crystallize that the employee has received something of value in return for giving up any future right to sue the company for additional compensation. The company should be able to legitimately claim that the separation consideration reflects the results of a good faith, arms-length negotiation between the employee and the company.
The purpose of a well-drafted release is to address two primary issues: prohibited claims and covered persons. The prohibited claims should cover everything under the sun. In other words, the language of the release should be broad enough that it would be impossible for the employee to conjure up a single exception that would allow the employee to legitimately bring a claim against the company. Not only should the release be drafted as a blanket statement to cover all claims and losses under any legislation in existence, but it should also specify those laws that might be of particular relevance to employment considerations and the company's business. Furthermore, the release should include a promise (covenant) by the employee not to file any suits or claims against any covered persons, or else the employee will be liable for any attorney's fees and other costs incurred by the company to deal with the action.
The "covered persons" are the persons and entities protected against any claims by the employee. The covered persons should include not only the company, but also its affiliates (parent companies, subsidiaries, divisions, joint venturers, and the like), equityholders (stockholders, members, or partners), managers, directors, employees, contractors, agents, representatives, and other stakeholders. The company should think of itself as negotiating the release on behalf of itself and anyone else in its orbit who could be subject to a claim by the departing employee. For more discussion on employee releases, see Should You Sign a Release When You Lose Your Job?
In many ways, the release component of a separation agreement is similar to that of a settlement agreement between litigants. Both parties are coming to the table in good faith to reach a mutually agreed-upon resolution in order to avert further conflict; however, neither party wants to admit that they were wrong. The convenient thing about a separation agreement is that neither party has to admit to any liability. In fact, these agreements, as with most settlement agreements, include a specific clause whereby both parties agree that the agreement is not an admission of liability by either party in any way.
At some point after departing the company, it is only natural for the employee to seek new employment. One thing commonly overlooked in separation agreements is the agreed-upon protocol for when an interested employer contacts your company to inquire about your former employee and whether or not you would offer a recommendation. This can often lead to awkward situations where you either do not want to comment or risk portraying the employee in an unfavorable light. As such, it is advisable for a separation agreement to include a stated procedure for the company to deal with such situations. A standard provision simply requires the company to acknowledge the employee's position and dates of employment (and nothing further), provided that the company always has the option of making positive comments, if it wishes.
Another way in which a separation agreement is much like a settlement agreement is that both parties typically want to keep the contents of their agreement secret from third parties. As such, these agreements should also close the circle by including a nondisclosure provision with respect to the terms of the agreement. This is not to be confused with a nondisclosure provision regarding the company's confidential information (see Nolo's article How to Protect Company Property in an Employee Separation Agreement). This is a separate provision making it clear that neither party will disclose the contents of the separation agreement to anyone, other than to their immediate family members, legal representatives, accountants, insurers, tax authorities, or others who are on a need-to-know basis.