Response to Reader’s Questions Regarding Severance & Separation Agreements

02
Dec
2007
Posted by: charlesakrugel  /   Category: Business Management / Charles Krugel / Contracts / Employment Agreements / Employment Law / Human Resources / Labor and Employment Law / Practices / Separation / Severance   /   2 Comments »
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Ritu Anand of GE India sent me the below questions concerning my October 28, 2007, post concerning severance and separation agreements.

Hi Charles ,

Thanks for throwing light on this subject ! However, I have a few doubts and would appreciate if You could help resolve them:

1. What is the guarantee that the exiting employee would not reveal the secrets / sue the firm even after signing the severance agreement / taking the money ?

2. is this a common practice in US / other parts of the world?

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Regards

Ritu Anand

HR

GE – India

My response to Ritu follows:

Hi Ritu,

Thanks for your questions. They’re excellent and thoughtful. I’m going to post them and my responses to the HR Community’s list serve and on my website.

I’m answering your questions in the same order and number you asked them.

1. What is the guarantee that the exiting employee would not reveal the secrets/sue the firm even after signing the severance agreement/taking the money?

Answer: As a means to discouraging the employee conduct you refer to, all severance and separation agreements should permit the employer to recover damages, costs and expenses from the employee (assuming the legal system permits such recovery). This won’t absolutely prevent an exiting employee from talking, but it increases the likelihood that they won’t breach the agreement.

Even if a severance or separation agreement prohibits disclosure, if the ex-employee breaches, the employer still needs to take enforcement action. This does not necessarily mean that the employer has to sue the ex-employee. The employer can issue some type of warning (letter, phone call, etc.), or the employer can contact competitors and warn them about using such secrets. The latter action poses its own risks due to ethical concerns, antitrust, defamation, libel and slander concerns. Obviously, the most extreme action an employer can legally take is to actually sue the ex-employee for breaching the agreement. A lawsuit will cost the business time and money, even if they can recover damages, costs and expenses from the employee.

With respect to a lawsuit or some other sort of complaint by the ex-employee, this is easier to deal with. As long as the terms of the agreement’s confidentiality, nondisclosure and other prohibitions are legally compliant, no court or other sort of tribunal should adjudicate a lawsuit or complaint, and all costs, expenses and damages should be awarded to the employer.

2. Is this a common practice in US/other parts of the world?

Answer: Yes, this is a common practice in the U.S., and it has been increasing in popularity. These agreements used to be reserved for top executives and are now being used for employees at all levels. The confidentiality and noncompete aspects of these agreements are also commonly used for pre-employment agreements between employers and employees.

With respect to its popularity in other parts of the world, it depends on the nation’s, province’s or region’s legal system. Common law and “Westernized” legal systems are likely to uphold severance and separation agreements as they’re mutually agreed to contracts with valuable consideration exchanged between the parties. Additionally, more capitalistic economies ( e.g., former Soviet-bloc nations) might be more prone to honor such agreements as the protection of the employer’s property (capital) is paramount to innovation and profitability. However, these same legal systems will take measures to protect and ensure an individual’s ability to apply their skills, trade, knowledge and abilities in an unrestricted manner. After all, if individuals cannot freely earn a living, then they cannot consume the goods and services employers produce, and businesses will lose money.

3. If this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees and all working population must be aware of this .. your views ..

Answer: I briefly discussed your concern in my article. Excerpted below:

“Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.”

To expand further upon this, you might be right to say that “[i]f this is a common practice with the organizations in the US , most of the companies would end up busting their HR budgets by paying severance to the exiting employees.”

There are U.S. companies which have a reputation for caving in to exiting employee demands for large severances because they’re afraid of the public relations ramifications of lawsuits, complaints, ill-will, etc. Some companies just think it’s cheaper to offer money than to defend their record. But, as I indicated above, the likelihood of a legal precedent being set is minimal.

The concerns regarding employee morale and feelings of entitlement can be combated by offering severance and separation agreements infrequently or in extreme circumstances (e.g., in order to protect company confidentiality, capital, etc.), and making it clear to employees that they are at-will employees (if applicable). In other words, it’s relatively easy in an article like this to state in a generic and sterile manner what should or shouldn’t be done. It’s a completely different matter to actually draft and execute an agreement in a way that sufficiently communicates to a particular employee and the entire workforce that this is an isolated and unique circumstance, and a serious and binding agreement with provisions that must be honored. In short, how individual businesses and practitioners implement severance and separation agreements is crucial. Issues with execution are what leads to misunderstandings, disputes and your questions. I personally believe that many of the issues you allude to are avoidable and resolvable via a professionally drafted and executed severance or separation agreement and the advise of competent legal counsel.

Now, a few caveats. My original statement, as well as my response to your questions, are general statements and not intended as legal advice nor do my statements create any sort of attorney-client relationship. Moreover, as stated above, every circumstance is unique and might require its own unique agreement, contract and mode of execution. Again, consult competent legal counsel before taking any action.

I hope that this answers your questions. Feel free to ask for additional information or opinions. Moreover, thanks for taking the time to read the article.

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2 Comments

  1. Michael Moore January 2, 2008 at 3:39 pm  / 

    Chuck:

    The strength of a severance agreement containing a nondisclosure agreement and release is always a question that businesses raise with me too. To improve the businesses chances of not getting into litigation, I suggest that any severance payment be made over time rather than in a lump sum. That gives the business the opportunity to stop payment if there is a problem and the former employee is not likely to sue if he is still owed money. I try to spread the payments out past the limitations period of filing an EEOC complaint, if possible. Repaying the money if you sue would be great; however, the tender back of consideration is problematic under the Older Worker Benefit Protection Act provisions of the ADEA. Sometimes, I will allocate some money to the nondisclosure portion of the severance agreement and provide that it must be repaid as liquidated damages if there is a breach or suit is filed.

    One of the biggest problems with litigating breaches of nondisclosure agreements is that it can place customers in the middle of a legal battle which is really bad for business. Businesses should know this risk is there.

  2. charlesakrugel January 5, 2008 at 12:00 pm  / 

    Thanks for the comment Michael! You’re 100% right. Using an installment pay or spread schedule is a great way to prevent or reduce the potential for a breach.

    Chuck



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