What is a California Separation Agreement?
The definition of a California separation agreement is an agreement that terminates the employment relationship between an employer and an employee. A separation agreement is a kind of post-termination settlement agreement. Under California law, an involuntary separation (for example, through termination) and a voluntary separation (for example, voluntary resignation) can be settled through a separation agreement once the employment has ended. A separation agreement is different from an employment agreement and a severance agreement, despite some overlap in their definitions. Generally, an employment agreement governs a business relationship (if it even exists) prior to, and possibly during, the employment of the employee. Conversely, a separation agreement comes into play at the time the employment relationship terminates.
Typically, a California separation agreement will include several elements. First, a separation agreement will contain recitals, which are generally factual statements about the employee (such as, "Employee was an employee of Company from 2001 until Company terminated Employee’s employment"). Recitals can also include statements about the employment relationship. Second , a California separation agreement will include a release clause. A release clause essentially says that the employee waives his or her claims against the employer in exchange for valuable consideration by the employer, such as severance pay or a neutral reference.
Third, a separation agreement will include language requiring the employee to return property to the employer, to not disclose confidential information, to not disparage the employer, and to comply with other obligations in the employment relationship, such as a non-solicitation clause. A separation agreement may also include a clause requiring the employee to cooperate in necessary matters, such as a termination interview, and to execute any necessary documents to effectuate the purposes of the separation agreement. Fourth, the separation agreement will include any cascading forfeitures, or any automatic forfeitures, of the employees rights (such as to continue coverage under the employer’s benefits plans), or any amounts the employee is owed. Fifth, the separation agreement will include the employee’s general release of claims. This is the most important section of the separation agreement.
Requirements for Enforceability
California law has long recognized that a separation agreement may be enforceable even if a release of claims is not given in advance of separation from employment. Cal. Lab. Code § 206.5; Peters v. Comsys Info. Servs., 2008 U.S. Dist. LEXIS 109750 (N.D. Cal. Nov. 6, 2008) (adopting holding of McCombs v. Los Angeles, 55 Cal.App.4th 1353, 1358 (1997)). So long as it is mutually agreed upon and supported by consideration, a separation agreement may also be enforceable though made after separation from employment.
The statutory requirement that separation conditions be "mutually agreed upon," Cal. Lab. Code § 206.5, does not require that the employer offer or the employee accept new consideration provided in exchange for execution of the separation agreement. Miners v. Neltrust Corp., 2009 U.S. Dist. LEXIS 98426 (S.D. Cal. Oct. 19, 2009). This is true even though such agreements are often made during periods when the employer faces financial hardship and seeks to reduce its work force. Peters, 2008 U.S. Dist. LEXIS 109750 (noting that employer’s "pushing" of release was understandable because of its desire to minimize layoff costs in "troubling economic conditions"). An employer’s lack of bargaining power in light of its economic hardship may have been a factor in the case law leading to this result, but reason certainly exists for treating hardship as a valid business consideration given that it often drives the decision to make an offer. An agreement reflecting mutual consent under such circumstances should not be voidable simply because of a disparity in bargaining position.
The agreement must be supported by consideration sufficient to support a unilateral modification of the employment contract. Cal. Lab. Code § 206.5; Peters, 2008 U.S. Dist. LEXIS 109750 (insistence on execution of release was not unduly coercive where offered at same time as severance pay); Miners, 2009 U.S. Dist. LEXIS 98426 (finding consideration sufficient to support unilateral modification of employment agreement).
An agreement may not violate California’s public policy against settlement of workers’ compensation claims without approval of the Workers’ Compensation Appeals Board. Cal. Lab. Code § 5000. The public policy discouraging settlement of workers’ compensation claims without approval of the Workers’ Compensation Appeals Board is not, however, implicated by perception. A claim need only be "believed to be within the coverage of the act," Gonzalez v. Workers’ Compensation Appeals Bd., 91 Cal.App.4th 64, 65 (2001), and results from "unforeseen injury" with uncertain "future consequences," Beneficial Standard Life Ins. Co. v. Smith, 40 Cal.App.4th 233, 241 (1995); Gonzalez, 91 Cal.App.4th at 71. The departure from the normal course may be caused by complete uncertainty, Peters, 2008 U.S. Dist. LEXIS 109750, by the inherent unpredictability of outcomes, Gonzalez, 91 Cal.App.4th at 71, or by the mere fact that legal action has not been taken, Beneficial Standard Life Ins. Co., 40 Cal.App.4th at 243-44; Peters, 2008 U.S. Dist. LEXIS 109750.
Essential Terms to Include
An important feature of any California employment separation agreement is the need to mutually agree to continue the confidentiality of whatever information an employee may have obtained through his/ her employment. In the legal context, this is referred to as a "mutual non-disclosure agreement".
What an employer has to communicate to the employee is that, as part of continuing employment with the company, the employee agreed to treat proprietary and confidential materials on behalf of the employer as confidential information that could not be used or disclosed outside the company. By executing a separation agreement, the employee is reminded that she/he continues to be bound by confidentiality and agrees not to disclose such information even after separation from the company.
Another clause to include is an agreement by the employee to abstain from competing with the company for some reasonable period of time after the separation. The following facts are taken from California case law and serve as a guideline in California for deciding a reasonable period of time restriction:
A useful clause to include in a separation agreement is one that includes a reference to the confidentiality of the documents that the employee may have received during the course of employment. By including such a clause in the separation agreement, the employee agrees that he/she will destroy all such documents.
Finally, while not all California employment separation agreements are required to include a release of claims, it is nonetheless a good practice to have the separating employee sign such a release because it protects the employer from potential litigation by the separating employee. A release is a generic waiver to claims and it can be broad or narrow. The release can cover, as an example, all claims related to employment discrimination, but such a broad agreement may not be necessary.
Advantages of a Separation Agreement
For employers, a well-drafted separation agreement provides protection against future lawsuits as well as the opportunity to remediate any potential liability. It also provides closure on employment and makes for an easier transition for the employee. For employees, a well-drafted separation agreement provides short-term economic benefits to help the employee bridge the gap between jobs . It also allows the employee to transition away from employment in a dignified way, without the stigma of a termination. Moreover, it provides some certainty regarding future financial support as well as an opportunity to close the door on the employment relationship in a way that may not occur in the case of a termination.
Risks and What to Avoid
While a well drafted and mutually agreeable separation agreement can be the first step in moving to the next chapter of your career, poorly written agreements can pose potential risks or pitfalls to employers and employees. Without the guidance of experienced counsel, both sides can be taken advantage of. One common mistake that is made is using vague language. If the terms of the agreement are open to different interpretations, it may end up that the terms of the separation agreement are not carried out as intended. Therefore, the best way to avoid this is to use clear language that is specific to what a party wants to achieve.
Another common risk when drafting a separation agreement is the likely omission of clauses that may later be critical to one party but were left out. Such provisions include confidentiality, non-disparagements, and how to handle any potential breach of the agreement. Leaving out these causes can create unknown risks and leave parties unprotected.
When to Seek Legal Counsel
When you are uncertain whether the employer has properly calculated the severance benefits you are entitled to. For example, what if you received a commission, bonus or other incentive compensation for doing your job? Does the employer have the right to claw this back as they are "recouping" compensation they believe you owe them? Are there others with similar claims every affected by the same practice?
In such a case it is prudent to have an employment law attorney review the situation before signing the agreement . An attorney can provide advice about whether the recoupment provision is legal under California law, suggest ways to deal with the provision itself or obtain an agreement not to offset it while still being able to raise a legal claim for that amount in the future.
It is always best to determine your rights before entering into a separation agreement to retain all of your rights going forward.