WHAT SEPARATION TERMS SHOULD EMPLOYER AND EMPLOYEE NEGOTIATE?
By Charles T. Hoge on August 03, 2017
An employee who is about to be terminated by her employer has many issues to consider in a separation negotiation. An employer may have many things to offer at little expense or inconvenience.
The focus of a separation negotiation is usually the amount of severance payments. Employers do not want to incentivize employees to malinger in seeking new employment, and employees usually fear how long the upcoming job hunt will actually take. These considerations can be addressed creatively by paying severance out over time, by an employer agreeing to pay half of the employee’s future income shortfall over more time until she finds new work, and other similar adjustments that send a message that the employee is sincere in her concern about obtaining new employment while also motivating her job search. The structure and conditions of the severance payout, and not just the bottom line amount, present a win-win opportunity for the parties if they are willing to keep each other informed about the employee's efforts to find new work.
In an abrupt termination, there may not have been an orderly transition of company property back to the employer. There may not be agreement on what actually is company property. The separation negotiation is an opportunity to agree on these details such as who retains the employee's laptop that the company purchased (and probably depreciated off of its books) which the employee used for both work and personal matters. This is also an opportunity to migrate data from the employee's computers so the employer does not suspect the employee is using confidential information while later working for a competitor. The employee can be assured that his personal information has been retrieved and deleted if the employer retains the computer.
This issue should be raised early by the employee who communicated with counsel through a “company” computer because those communications may not be protected by the attorney-client privilege. If the separation negotiation is unsuccessful or hostile, the employer may be increasingly less willing to allow those communications with counsel to be retrieved by the employee or deleted.
Most employees would benefit from outplacement assistance. Employers normally do not begrudge a reasonable and modest request for outplacement assistance. This request may also help demonstrate sincerity in the employee’s position on the duration of severance payments and his need to search far and wide for new employment.
A Settled Statement About the Termination and Confidentiality
Confidentiality provisions in separation agreements raise many issues. Confidentiality goes hand in hand with negotiation over what the employer will say, or not say, in response to reference requests and informal contacts by prospective employers. How confidentiality issues are handled vary by industry and whether people can be expected to “talk” in a tight-knit industry or setting. Any discussion about confidentiality should include a discussion about crafting a consistent statement why the employee has left the company (the “message”).
The prevailing position of California employers is not to provide references to prospective employers as a matter of “company policy.” This is because employees have a remedy under the Labor Code for a false or misleading employment reference, and a future employer may be able to sue the prior employer for providing a false positive reference if the employee does not work out. The reality is that references have a way of getting out one way or another, and a separation negotiation is an opportunity to control the “message.” Employers often give up their position of refusing to provide references if the parties can agree on who will provide the reference and what will be said. This could mean a friendly mid-level manager who still thinks highly of the employee, can be designated to respond to calls for a reference and will provide that reference even if the human resources department and senior management refuse to do so as a matter of "company policy." However, an employer will be disinclined to have too many people involved in providing pre-negotiated references because that risks that one of them may stray or forget and breach the separation agreement. The best approach is to specify an agreed-to script for one or two friendly managers to provide about the employee to prospective employers.
If the employer refuses to provide a reference or authorize anyone in the organization to do so, the employee can accuse the employer of hindering the employee’s ability to find new employment and argue that more severance is required to get by and not sue. The employee needs to be able to truthfully state in a job interview why her employment ended, and the reference should match the information shared in that interview. The former employer can become quickly motivated to craft the "message” and agree on who will deliver it if the severance amount comes back into play in the separation negotiation over the reference issue.
The separation negotiation is also an opportunity to see if the situation can be mitigated by an agreement that the employee actually resigned. The employee may then avoid questions in job interviews about whether the resignation was “forced.” Ideally, a separation negotiation happens before a termination so that the employee can confidently and truthfully assert in future job interviews that her termination was voluntary. Employers often overlook the opportunity of offering employees the opportunity to resign before they are terminated, and employees similarly misperceive that they will automatically lose the opportunity to seek unemployment benefits if they resign voluntarily.
Since a terminating employee is probably concerned about finding new employment, and his job prospects are likely better if he can claim he is still working when he sits for an interview, the employer may be willing to provide severance in the form of paid leave or enter into a modest consulting agreement with the employee that carries on until the employee finds new work. The employee could be "on call" as needed. If never needed while “on call” the employee still has the benefit of claiming they are employed when they interview. A hasty termination by an employer wastes the opportunity to consider measures that may help the employee find a new job.
Another overlooked issue is that the employee may be asked to release information in her personnel file to a prospective employer. The separation negotiation is an opportunity to discuss removing or correcting information in the personnel file.
Confidentiality provisions can be sticking points in a negotiation because they are hard to police and enforce, and one side may insist on onerous remedies for a breach that is unacceptable to the other. Once the reference issue is resolved, and if the "message" has been worked out, the less need either party really has for a confidentiality commitment.
Terminating employees should consult with a tax expert about separation terms. Normally severance payments are taxable as ordinary income. Many employees misperceive that funds can be allocated to "emotional distress" damages so that they are not taxable. The potential shelter is more narrow and applies to funds paid on account of physical injury or sickness – an unusual situation in an employment termination. The characterization of money paid and a specific allocation of those funds from the employer’s perspective should be made in the written separation agreement if it is appropriate to contend any of the payments are not taxable.
The separation agreement is an opportunity for an employee to avoid forfeiture of unvested stock options and to lock down reasonable terms to exercise options. These issues should also be considered from a tax standpoint.
One side often wants a commitment in the separation agreement that he will not be “disparaged.” The law already protects both employer and employee from “defamation,” but including an anti-disparagement commitment in a separation agreement provides broader protection. In reality, these provisions are usually vague and difficult to enforce. They may deter disparagement, but they are usually ineffective unless coupled with a “liquidated” damages remedy when they are breached. An anti-disparagement provision should specify that on breach, the parties agree that damages from disparagement would be difficult to measure and they should specify a reasonable sum (not a “penalty”) as such "liquidated" damages. It also makes sense to specify that disputes whether "disparagement" actually occurred should be decided in private, binding arbitration. Neither employee nor employer should expect these provisions will actually be enforced effectively, although on rare occasions they are.
No Hire Covenants
Employers occasionally want a commitment that the employee will not reapply for work (usually so that the employee cannot claim discrimination or retaliation again when they apply and are not rehired). The law is developing in this area, but these commitments are likely not enforceable in California. However, an employer should give careful thought to why it needs a no hire covenant before requesting it.
Covenants Not to Compete
These are normally unenforceable in the State of California unless the employee happens to be selling equity in the employer’s business under the separation agreement. There is uncertainty under California law whether an employee’s agreement not to solicit the employer’s other employees is enforceable. An employer may try to negotiate for these covenants by issuing stock to employees tied to these provisions or by specifying the law of another state applies to the employment contract or separation agreement. These provisions require careful analysis whether they are enforceable.
The separation negotiation is an opportunity to discuss continuation of employee benefits that may still be available after termination. For example, under the Consolidated Omnibus Budget Reconciliation Act (COBRA) an employee should be given notice on termination of her right to purchase continuing group medical coverage for a specified time period (usually six months). The negotiation is an opportunity to discuss having the employer pay for some or all of that continuation coverage. Putting the employee on "leave" for a time before a termination becomes effective may be another way to extend the availability of benefits for the employee.
Employment separations are serious and emotionally difficult situations for employees. They should not be hastily carried out by employers, and the details of a separation package should be carefully considered by employees. Both may find opportunity to soften the blow on acceptable terms in a carefully planned negotiation.
Charlie has practiced employment litigation for over 30 years and has tried employment cases for both employees and employers. He is a past Chair of the Labor and Employment section of the San Diego County Bar Association, and has been recognized perennially as a Super Lawyer and as a Top Attorney in multiple practice areas. In 2015 Best Lawyers in America recognized him in both Commercial Litigation and Employment Law – Management.
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