Separation Agreements

Employment severance agreements, and settlement agreements arising out of employment disputes, usually provide for the payment of money, either in a lump sum or over time, or the continuation of some benefits, such as insurance or a company car, in exchange for the former employee’s agreement not to sue the former employer, or to not compete against or speak badly of the former employer, or to keep certain matters confidential.Some severance benefits may subject the former employee to a heavy excise tax. Exceptions to the tax apply when the severance is a payment of money made on account of an involuntary termination, below a dollar amount set by statute, and made within a certain period of time. Other exceptions apply to lump sum payments made at termination. Situations that involve continuing insurance benefits or the use of a vehicle after employment or “deeming” a former employee still employed are more problematical and must be carefully reviewed.

In addition, the former employee’s agreement not to sue the former employer usually contains a broadly written waiver in which the employee releases all claims against the employer. These waivers are often boilerplate, and include releases of claims based on federal statutory employment rights, such as equal employment opportunity, minimum wage and overtime, medical leave, and benefit security. Some of these types of claims can be voluntarily released. Others, however, cannot be released, or can only be waived to a limited extent. To make matters more complicated, there are several splits of authority among the court over which standards apply to releases of claims arising under various statutes. There is no single rule of thumb regarding releases of these claims.