Crucial Provisions for a Favorable Employment Termination Agreement

If an employee has the opportunity to negotiate her termination, she can bargain for a number of provisions to protect her rights, or to protect her ability to enforce them through a settlement agreement.

The first section of this entry highlights provisions that can best achieve those ends for an employee. In contrast, the second section explains a number of provisions most important to an employer, which an employee will want to guard against.

A. PROVISIONS ADVANTAGEOUS TO THE EMPLOYEE

 Fundamental Matters

The settlement agreement should state clearly whether it will be a “structured settlement,” in which the employer makes periodic payments to the employee. The employee should ensure that the settlement agreement details which account will fund these payments, when they will be made and by whom, by what means, and to what address and recipient.

The settlement should also clearly state the “venue” for any enforcement action, i.e., in which state or court these actions must be filed, as well as which state’s law will apply.

 Release Language

The agreement should include (a) a release of all parties from liability, and (b) a release of all possible legal claims the parties could file against each other. An employee should also negotiate for a mutual release, which has the effect that after signing the agreement, each party is finished dealing with the other.[1]

Consideration

To be enforceable, the terms of the settlement agreement must show that each party gives a form of consideration to the other, meaning that each will release a legal right or give something of monetary value to the other party. Consideration can take any of several forms of payment or legal right, but whichever the means, the agreement should contain as much detail on the exchange as possible. The parties should agree on the time, place, and means of payment; the specific person who will effectuate it; the right being released or the amount being paid, and from what account or other source, specifically.[2]

Cobra

The terms of the agreement should specify how the employer will continue to handle COBRA payments for the employee if they apply. The agreement should pinpoint (a) the date COBRA coverage will end, (b) whether the employer will have any further obligations to the employee regarding fringe benefits, (c) which party bears the responsibility to apply for COBRA continuation coverage, (d) which party will pay for the COBRA coverage, (e) and that the employer will provide the employee with notice of his/her right to obtain continuing COBRA coverage. [3]

Dismissal and Withdrawal of Claims

The agreement should also state that the underlying lawsuit will be dismissed with prejudice by a specific date, such that it cannot be filed again once the agreement is executed.

Non-Disparagement and Neutral References

The employee should bargain for a mutual non-disparagement clause, which bars each party from making negative or disparaging comments about the other, to ensure that the circumstances of the settlement will not negatively affect her future career. A neutral reference clause requires an employer to give an unbiased reference to future employers, disclosing simply the position the employee held and for what duration. A better option, the provision could require the employer to refer requests for references to its director of human resources, and require that person to make no disparaging remarks about the employee. The employee might also want a provision requiring the employer to destroy all records concerning or reflecting proceedings related to the employee and the settlement, such as EEOC proceedings or disciplinary measures.

Other Agreements

The settlement agreement should also explain how it will affect prior agreements between the parties, such as non-compete, or trade secret agreements. Specifically, it should state whether the settlement incorporates or renews the prior agreement, or whether it extinguishes them. Clarifying the status of former agreements will help an employee avoid suit by her employer after the settlement.

Liquidated Damages and Enforcement Procedures

The agreement should state in detail how disagreements over the settlement agreement will be resolved. It should state whether the parties must use arbitration and whether they must first meet for collaborative discussions. It should also state whether the parties will additionally have a right to equitable relief, i.e., a lawsuit based on the settlement agreement.

Safe-Harbor Provision

The employee should protect herself by ensuring that the agreement contains a provision that allows the parties a grace period to correct any alleged breaches of its terms, to avoid litigation over its enforcement.

“Zipper” Clause

The agreement should state that it takes the place of all oral agreements between the parties and that all amendments to it must be written and signed by each party. Doing so will mean that the parties may only refer to the written agreement going forward, and cannot rely on statements it does not contain.

Attorneys’ Fees

The agreement should detail how the parties will divide the legal costs of the settlement.

B. PROVISIONS EMPLOYER’S WILL WANT

 Waiver of Claims, Or Admissions

An employer will likely seek to disclaim liability for the underlying allegations. An employee should limit this disclaimer, if possible, and limit the number of disclaimers in the agreement. Also, a number of claims can never be waived, including suits under the Fair Labor Standards Act. Thus, an employer often bargains for the agreement to include an acknowledgement by the employee of underlying facts. Yet the employee should be wary of what facts he would be admitting, and wary of making these acknowledgements at all. The employee should also negotiate for a mutual release of claims.

Confidentiality

This provision contains 3 components: (a) a provision that the parties will keep the existence of the settlement, and its terms, confidential; (b) a specific statement that each party must give if questioned about the claims; and (c) a penalty if either party violates this provision. The employer will also attempt to have the employee’s spouse and attorney agree to this term.

Violation of Terms

The employer will seek to prevent the employee from backing out of the settlement agreement by including a provision that if the employee files a claim against the employer or seeks to invalidate any provisions of the agreement, then she must return all payments made to her under the agreement.

Non-Assignability of Claims

The employer will want the employee to acknowledge that she has not assigned to another party any of the claims she has or may have against the employer. The employee should be careful, if possible, to retain the ability to assign these claims to an executor, personal representative, spouse, or perhaps a dependent.

C. FINAL THOUGHTS

In a settlement negotiation, if an employee keeps in mind the provisions important to an employer, she can better anticipate the employer’s demands. If the employee also adds to the agenda a discussion of provisions that favor herself, she can reach a better short-term bargain, prevent the employer from filing additional suits against her, and better protect herself for future phases of her career.