What is a Mutual Separation Agreement?
Mutual Separation Agreements are more commonly used by companies to end employment relationships. A Mutual Separation Agreement (sometimes called a Mutual Separation Agreement and General Release) is a separate agreement that an employee signs with the employer at the time of termination of employment. The Agreement detects or fixes any problems with the severance pay amount (or any other continued benefit) to be provided to the employee; bars the employee from making any claims against the company related to his tenure with the company; and includes a confidentiality clause which protects the company’s business interests. As opposed to other types of termination agreements such as those based on unilateral resignation or mutual resignation, a Mutual Separation Agreement may also provide for certain third party rights and benefits (such as pension benefits) to flow to the employee .
A company may choose to enter into a Mutual Separation Agreement with an employee for many reasons. Perhaps the employee was employed in a position that the company is planning to eliminate. Reorganization is a common business strategy to improve efficiency and/or reduce costs. Depending on the length of service, level of income and relevant provisions of an employment contract or the Employment Standards Act, an employee’s entitlements can be substantial. Or perhaps the employee is employed in a position that no longer suits the evolving needs of the company or perhaps the employee is not suited to his role. In any case, the Parties may want to part as amicably as possible while ensuring that the employees’ rights are adequately protected. This is where the Mutual Separation Agreement comes in.
Major Elements of a Mutual Separation Agreement
After you agree to separate, a mutual separation agreement offers the employer a chance to protect itself in several ways. The most common components of a mutual separation agreement are:
- Separation payment. The employer offers the employee some severance. The standard offer is 2 weeks for every year of service. You may wish to pay more. And you can compensate yourself with a "release fee" that is in addition to any wage payment.
- Release of claims. The employer requests that the employee sign away all employment claims as a condition of receiving severance.
- Confidentiality. In exchange for the severance payment, the employer requires that the employee agrees not to disclose the terms of the deal to anyone other than his or her spouse and financial advisor.
- Non-disparagement. In exchange for the severance payment, the employer requires that the employee not say anything more harsh about the employer than "the company made some difficult decisions."
- Employer non-disparagement. In exchange for the severance payment, the employer requires that the employee not say anything more harsh about the employee than "I think the employee had a good run there."
Other provisions that could be included in a separation agreement are:
- Mutual waiver of non-compete/non-solicit. If you signed a non-compete or non-solicit agreement when you join the employer, you may want to ask that the employer waive those provisions in return for your agreement to the mutually beneficial deal.
- Refund of relocation assistance. If you received relocation assistance to move to the area when you joined the company, the employer may require that you repay that money in return for your separation assistance.
- Assistance with next job. The employer offers its help in looking for your next opportunity.
- Letter of recommendation. The employer offers to draft a reference letter on your behalf in return for your separation assistance.
Impact of a Mutual Separation on Unemployment Benefits
Mutual separation potentially impacts unemployment benefits in accordance with NJSA 43:21-5(a)(1), allowing benefits to be awarded provided "a majority of the employment in the base year was covered by an agreement to that effect." Not every party to a mutual separation agreement is entitled to unemployment benefits. "If the separation resulted from any reason under which benefits may be paid according to subsections a through h of section 1 of P.L.1941, c.150 (C.43:21-1), any person whose employment is terminated shall, if otherwise eligible, be compensated according to such subsections and not pursuant to the mutual separation agreement."
The factors and conditions under which approval for unemployment insurance benefits are granted include: "(a) Compensation shall be paid to individuals with respect to any week only if the deputy determining eligibility for benefits finds that … (2) The individual has been unemployed for each week for which benefits are claimed, except that benefits shall be paid if the deputy finds that the unemployment of an individual was due to a closing of his place of employment or due to a business restructuring, and the person is otherwise eligible under subsection (a) of this section. (b) Compensation shall be paid to individuals with respect to any week only if the individual is able to work and available to perform such services as the commissioner may require and is capable of performing such services. (c) Compensation shall be paid to individuals with respect to any week only if the individual has registered for work at an employment office in accordance with such regulations as the commissioner may prescribe, unless the individual is not subject to such registration requirements under this act.
How to Maintain Eligibility for Unemployment Benefits
The following are some suggested strategies for drafting a mutual separation agreement in a way that preserves eligibility for unemployment benefits. To further this goal, the agreement should not use the term "separation" to describe the end of the employment relationship. The best practice is to have both sides think of the "end" as a resignation by the employer. The agreement should contain language confirming that:
This language is not foolproof and a recent case illustrates, however, that such language may help preserve unemployment benefits eligibility. In the pending case of Davis v. Securitas, the employee was not asked to sign any severance agreement containing the language described above. She therefore argued to ESD that she was involuntarily separated. ESD agreed, but the employer appealed. The Appeal Tribunal held that the parties had mutually terminated the employment relationship and therefore disqualified her. On review, ESD Commissioner Pamela Dannen Feldman opined that the employee "had a reasonable expectation, based on [her] conversations with the employer, that she would be permitted to work through the end of the month" and therefore applied the as yet unpublished employment stabilization rule created by Commissioner Dannen Feldman last year. The Commissioner did not specifically cite to the earlier unpublished decision that set out the fact pattern at hand. The earlier case was Davis v . Sims Group, Inc., which involved an employee who also voluntarily quit but had conflicting accounts of what had occurred with her supervisor just prior to the separation. In that case, too, the Court applied the unpublished decision, Davis v. Securitas, Inc., which concluded that quitting just before entering military service sheltered eligibility for unemployment benefits as it was assumed that "the separation [was] motivated by a compelling necessity outside of the employee’s control or before the employee otherwise considered resigning." The Court therefore overturned ESD’s disqualification decision and also reinstated Davis’ claim for back benefits during the disqualification period, as well as an award of a penalty and attorney fees. If the employer really does want a mutual separation including, importantly, a release of claims pending or arising in the future, then the better practice is to exclude any adverse or voluntary termination language whatsoever. Thus, the offer could state that it is being made to persons with whom the employer desires to maintain a positive working relationship. Once the employee accepts the offer, the employer and employee should schedule an informal exit interview and invite the employee to explain the reasons for his or her resignation. Although the employee should not be coerced into doing so, this interview/statement will become part of the record.
Issues to Consider Including in the Mutual Separation Agreement
Understanding Mutual Separation Agreements and Unemployment Benefits
Both parties to a mutual separation agreement have certain legal obligations and considerations to be aware of prior to entering into such an agreement. This includes immunity from claims advanced by the other party to the agreement. For example, the employer will typically pay to the employee a sum of money in return for a general release of claims, and should also insist that the employee release any and all subsequent claims to unemployment compensation benefits. The employee should insist that his or her eligibility for unemployment benefits not be impacted by the separation agreement.
This latter point is particularly important, as employers need to be mindful of potential claims for unemployment benefits advanced by employees who have entered into a separation agreement, particularly where such agreement has expressly released such advances. The state unemployment boards will often time find a way through its rules to allow an end-run around settlements that have been reached.
Employers should always seek counsel in drafting separation agreements, particularly where the parties are contemplating a mutual separation agreement. Heeran & Houghton has deep experiences on both sides of separation issues and litigation and advises both employers and employees/individuals in the context of separation agreements.
Conclusion: Weighing the Agreement Against Potential Benefits
In closing, it is critical to understand that for mutual separation agreements/settlements, both sides should be careful to seek out and retain independent legal advice and/or the advice of a professional with experience and knowledge in the area of employment law. Since mutual separation agreements, whether used in the context of a valid severance arrangement or a bona fide dispute, encompass a myriad of legal issues , it is incumbent upon the parties to the separation to collectively consider the pros and cons of both the agreement as well as any state employment unemployment benefits that may impact the final outcome.
While the law supports the premise that mutual separation agreements/settlements should not be a one size fits all approach, each separation/settlement agreement is fact specific and must be analyzed in good faith to determine the key legal issues relevant to the specific case. With the foregoing being said, these separation agreements or settlements should only be executed once all the terms have been discussed and negotiated by each side and the wisdom of each iteration and approach has been considered in good faith.