Wednesday, October 28, 2009

7 Items You Should Have in Separation Agreements for U.S. Workers Over 40

The Age Discrimination in Employment Act of 1967 (“ADEA”), was signed into law by President Johnson. Its stated goal is to protect workers age 40 and older from age discrimination. Since enactment, the ADEA has been amended several times, including changes within the Older Workers Benefit Protection Act (1990). Since the OWBPA, the general practice followed by most employment law attorneys has included formal separation agreements in order to foreclose claims and prevent problems while the employee is willing to trade a release for valuable consideration.

Before the Termination Notice

When an employee does not perform as required, it is vital that the employer document the substandard performance and the employer’s efforts to obtain satisfactory performance from that employee. (See earlier post, “Wasting Money With The Wrong Staff.”) You should ensure that you adequately communicated those performance expectations and that those standards are reasonable and consistent for all employees in the same job classification. (More on that in a later post.)

If the termination is for economic reasons, you have less concern about performance but new concerns when hiring afterwards. The laid-off employees will pay close attention to anything that looks like an effort to replace them with younger (and presumably cheaper) staff. Make sure you maintain documentation of the economic considerations other than the relative cost benefits of hiring younger staff at lower salaries. Eliminating an entire department is more defensible than only part of the department.

Make certain the documentation is complete and the personnel file is in order. (For suggestions on important employment agreement documents and terms, see my earlier post, "When Hiring, Consider Firing First".) It is essential that you follow your own policies and procedures to the letter. And never attempt to cover up an economic termination with manufactured performance failures.

Magic Paperwork

At the separation conference with the employee, you should already have prepared the following documents:

1. Separation Agreement with Release of All Claims
2. COBRA notification paperwork (if applicable)
3. Final paycheck as required by state law

The separation agreement, even for terminations for cause, should include these seven things:

a. A brief statement of the reason for separation. If the termination is for cause, the employer usually has more leverage than in other situations. This section does not have to restate the list of violations in detail, but can simply categorize the grounds as “for cause” or other terms used in the organization’s personnel manual or collective bargaining agreement.

b. A release of all claims against the employer. This need not be mutual, but cannot be prospective under federal and most states’ laws. The goal is to foreclose any claims based on anything that occurred prior to the effective date of the agreement. You do not want a stray overtime or discrimination claim to pop up later based on events prior to termination.

c. A statement of the compensation terms. All contracts must be supported by an adequate exchange of value. In return for the employee’s agreement to never pursue any claims he may have, the employer should provide something of obvious value. This can be cash, health insurance premiums, payment of unused leave beyond what the employee is entitled to receive, or other forms of compensation. You want the employee to see the benefit of accepting the offer, so frame the compensation accordingly without going overboard.

d. An ADEA/OWBPA clause. Workers over 40 must have at least 21 days to review the agreement or take it to their own legal counsel. They also have 7 days to revoke their signature. Never count the day you provide the document or the day it is signed. Therefore, you should not give the compensation until the 8th day after the employee has returned the signed agreement, counting the day after you receive it as the first day.

e. A confidentiality clause specifically for the separation agreement. Again, it need not be mutual. You want the employee to keep secret the existence of the agreement and any payments under it. A penalty clause may be difficult to enforce unless you spread compensation over a lengthy period, but you should include it, anyway. The risk of attorneys fees, litigation and even embarrassment may be enough to discourage violation, even for a “judgment-proof” former employee.

f. A jurisdiction and venue provision. Within the confines of your local employment laws, attempt to limit the places where the employee may litigate any disputes under the agreement. You want all litigation to take place where it is convenient for your lawyers to handle any disputes.

g. A general confidentiality clause for the organization’s secrets. You should have a confidentiality agreement already in place and signed at hiring, but consider re-stating it in the separation agreement. If you do not have one signed by the employee, then make certain to include it. Consider adding stipulated penalties and remedies to the extent appropriate in your jurisdiction. For some secrets, such as data covered under personal data privacy act, you probably have a duty to exact this agreement or confirmation.

Closing the Deal

Walk the employee through the documents, answer questions—but do not give legal advice—and make sure the employee understands the OWBPA timeframes. It never hurts to explain how the employee will benefit from accepting the package deal rather than refusing to sign, as long as you do not cross the line into legal advice, coercion or threats. If the worker is under age 40, you can agree to making payments faster than the OWBPA times, but you do not have to.

Some managers have balked at the prospect of “paying off” employees they terminate for cause. There is a good argument that such compensation is not necessary. However, if the goal is certainty and “buying peace,” a modest payment can be far cheaper than the deductible under your employment practices insurance policy. Unless you are a law firm, litigation will be a distraction from your primary mission and will involve significant non-financial costs even to win. Even for law firms, time spent suing or defending your own firm is money lost from work that could be billed to the firm’s clients. When the odds against collecting your legal expenses from a former employee are very low, you have a lot to gain from this strategy.

Whether for cause or economic reasons, employers who terminate staff need to always keep the ADEA and OWBPA in mind. It is generally a good practice to follow these same guidelines for all involuntary separations, but doing so with so-called older workers can help avoid costly employment discrimination claims.


This article is only a general guideline based on U.S. law. It is not intended to be and should not be relied upon as legal advice. Your state and local laws may give you more or fewer options in employment situations and local laws vary considerably. You should only use this as a discussion guide when reviewing your particular situation with a lawyer licensed in your jurisdiction.