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Important Details for Executive Severance Agreements

January 07, 2015

Posted in Business Start Ups, Employment Law

photo - executive severance by Greg WestfallIf you’re an executive who’s been asked to leave, or in a position where you’ll be terminating the employment of an executive, a separation agreement makes sense for all parties. Both parties will know what their rights and obligations are, the executive could find it easier to land the next job and the employer should be able to have a clean, professional break with the executive. These agreements present some issues that deserve attention.

  • Termination Date.

As the employer, how much time do you want the executive with the business after giving notice he or she will have to leave? The person may use the time to finish up various projects if the relationship is good, potentially poison the office if the relationship is bad. Vesting of equity or retirement benefits may be an issue that may warrant a later termination date, even if the person isn’t actively on the job.

  • Severance Amount.

Will it be paid? If so, how much? If the job loss is the result of a company sale or merger, who will pay it? Lump sum or amount paid over time? When? An employer should condition payment on a waiver of potential legal claims against it.

  • Other Severance Benefits.

They may be a bigger concern to the executive than the severance payment. Will health benefits continue? If so, for how long? Will there be a letter of recommendation written and if so, what will it say? Will executive outplacement services be provided?

  • Release Language and Exceptions from the Release.

An employer may not be able to legally have the executive release it from any and all possible legal claims, even if the executive is willing to do so. There may be limits to such releases and the person may need to sign a severance agreement and a covenant not to sue.

  • Post-Termination Restrictive Covenants and the Integration Clause.

Many agreements contain an integration provision, stating what’s on the paper is the entire agreement and the executive is not relying on anything outside the written document. If there is a prior agreement containing restrictive covenants intended to survive termination of the executive’s employment, such a general integration clause could void the prior restrictive covenant.

An alternative would be to include a provision in the separation agreement that ratifies the executive’s obligations in the prior agreement and incorporates that agreement into the separation agreement. If there are specific customer lists or types of information in the prior restrictive covenant agreement, the separation agreement needs to be updated to reflect any new customers or different types of information the executive had access to closer to the time of termination.

  • Non-Disparagement and Confidentiality.

If prior to the termination the situation was not good, emotions may be running high and there is a risk that either party may say or do something that may be regretted later. Both parties have an interest in protecting their reputations and interests so it makes sense for both parties to consider non-disparagement and confidentiality clauses. This will make it easier for the executive to find the next job and there will be no ‘tell alls’ about things that can put the company in a bad light.

  • Dispute Resolution.

Arbitration and other non-litigation dispute resolution methods can keep potential future ex-executive legal action out of the courts and maybe out of the press. If a company wants to require an executive to arbitrate any claims arising from the separation agreement, the rules to be applied and the types of claims that can be included need to be considered. A provision barring the executive from class or collective lawsuits could be included, requiring claims be arbitrated individually.

If you are thinking about firing an executive, or an executive whose been asked to leave and presented with a separation agreement, I can help you understand the language and negotiate clauses that best serve your interests while coming up with an agreement both sides can live with. Call my office so we can talk about what’s going on and what should happen in the future.