Ending The Employment Relationship

Protect your interests with a release agreement.

Terminating an employee can often feel like a daunting task. It is one that many employers delay far longer than they should, sometimes out of compassion, other times out of fear of potential litigation. However, continuing to keep a poor performer on the payroll can be far more costly to an employer in terms of reduced productivity, wasted management time in dealing with the employee, and poor morale in other affected employees.

The threat of litigation can be reduced significantly by sending the employee on his way with a severance and release agreement. A valid signed agreement can provide legal protection against a lawsuit. The key to these agreements is that they must be carefully drafted and tailored to the specific situation. All too often, employers make the mistake of using “canned” agreements that they have used previously or with language that they took from a number of different sources. Courts are quick to strike down a poorly drafted release agreement and rule in favor of the former employee because the employer failed to properly draft the document.

What Is a Release?
A release is a legal document where an employee agrees to give up rights or potential rights against the employer in return for some kind of “consideration.” Consideration can vary, but it must be something of value to the employee who is giving up his rights under the release agreement.

Consideration usually comes in the form of compensation, continued benefits, job placement assistance or other items with a cost to the employer. Consideration cannot be something to which the employee is already entitled. For instance, it is not sufficient consideration, and therefore not a valid release, for an employer to promise to pay an employee his bonus for a release of all claims. This is something the employee has already earned, regardless of the terms of the agreement.

The employer, on the other hand, is receiving consideration in the form of the employee giving up his or her right to sue or bring any other legal claim against the employer. If properly worded, this would include claims of discrimination, violations of state or federal employment laws, state tort claims, violations of company policies and other possible claims arising out of the employment relationship.

Determining to Use a Release Agreement
Release agreements are generally not necessary for every termination. Some of the factors employers should consider when deciding whether to offer an agreement include:

  • Whether the circumstances surrounding the termination suggest possible litigation;
  • Whether the employee may be protected by a civil rights law (for example, the employee is age 40 or older, or is disabled);
  • Whether the employee seems disgruntled or has threatened to sue;
  • Whether raising the issue of a release will prompt the employee to ask for more money or raise the possibility of a lawsuit;
  • The employee’s likelihood of success if a claim were filed;
  • Whether there are other effective alternatives to a release, such as asking the employee for a signed resignation.

What Should Be Included in a Release Agreement?
While determining what to put in a release can vary, there are certain elements that should be included in every release to enable it to accomplish its purpose. These include:

  • A statement that the employee is “knowingly and voluntarily” releasing his rights.
  • A statement outlining the consideration provided for the release of all claims.
  • Broad release language. The agreement must detail all possible statutory and common law claims. It should be worded broadly enough so as not to exclude any possible causes of action, but should provide references to specific statutes, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, and other state and federal employment laws. An employee cannot waive his rights to sue for a cause of action occurring after the date of the release.
  • A “no fault” statement. This is a statement that the agreement is neither an allegation nor admission of wrongdoing by the employer.
  • Protection of confidential information. This is a promise that the employee will not disclose or use the employer’s proprietary information or trade secrets (for example, customer lists or strategic planning information).
  • A statement that the employee has been advised of his right to consult with an attorney prior to signing.
  • An acknowledgement that the employee does not currently have a suit or other legal action pending against the employer.
  • Specific language for employees age 40 or older. Federal law requires that in order for an employee falling into this protected class to fully and effectively waive his rights, certain conditions must be detailed in the agreement. Some of these include a 21-day period to consider the terms of the agreement before signing (45 days for a group termination), a right to revoke the agreement within seven days of signing, and a specific reference to the Age Discrimination in Employment Act.

Other Possible Elements to Include
Other things an employer may want to consider including an agreement are:

  • Non-disparagement clause. This is a clause that the employee promises not to make any comments that would disparage the professional reputation of the company or its employees and managers. The employee may reasonably request that the company agree not to disparage the employee, as well.
  • Characterization of the end of the relationship. There might be some value in how the end of the relationship is characterized. For instance, if it is referred to as a resignation, the employee may have more success in finding a new job, but may have difficulty collecting unemployment insurance.
  • Payout options. Payout options may include lump sum, according to the regular payroll schedule, conditional payouts or some other option.
  • Handling future requests for employment references. Some employees request specific language in the agreement as to how the employer will respond to future requests for employment references.
  • Rehiring decisions. Employers often insist that the employee agree not to reapply for future employment at the organization.
  • Arbitration of disputes. It is becoming more common for parties to a release agreement to agree to arbitrate, rather than litigate, any disputes they may have over the terms of the agreement.
  • Return of employer property. If the employee is in possession of any of the employer’s equipment or property, the employer may want to provide for its return in the agreement.

Common Mistakes in Drafting and Implementing a Release Agreement
There are several mistakes often made in drafting and implementing a release agreement.

Failing to Consult an Attorney – A release agreement is a binding contract. In order for it to be valid, it must contain a number of necessary elements. As this is a frequent area of litigation, with courts continuing to hone the required provisions of valid agreements, an attorney’s input is critical.

Rushing the Process – Employees must be provided with adequate time to consider the terms of an agreement. As discussed above, for employees age 40 and older, there are specific statutory requirements. But even for younger employees, an employer does not want to be accused of rushing an employee to sign an agreement, and having to face a charge that the employee was involuntarily “forced” into signing the agreement. The employee’s waiver of rights must be knowing and voluntary.

Making the Payout Too Early – If the agreement calls for a revocation period after the employee signs the agreement (which is mandatory in agreements with employees age 40 or older), the company should wait until after the revocation period has expired to pay out under the terms of the agreement. The employee may urge the employer to pay it sooner, but once that money is paid, it will be virtually impossible to recoup it in the event the employee revokes his signature.

The key to drafting an agreement is the realization that every situation is unique. Employers cannot take a “one-size-fits-all” approach. If challenged in court, the employer has the burden of proving that the release agreement is valid. If properly drafted, release agreements can help put employers at ease about a decision to terminate an employee, especially when there are concerns about potential litigation.

Gases and Welding Distributors Association

Lisa Callaway Meet the Author
Lisa Callaway, JD, SPHR, is the director of labor relations/general counsel for The Management Association of Illinois, based in Downers Grove, Illinois, and on the Web at www.hrsource.com.