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In good times and in bad, organizations continually assess their operational structures and decide what it takes to keep them performing at their peak.  Because of this, downsizing, rightsizing, mergers, acquisitions, and just plain terminations happen.  During any of these situations, employers looking for potential measures of risk management may consider employee separation agreements.


What Are They?

In a nutshell, separation agreements serve to minimize the risk of litigation for employers by having terminated employees waive potential claims connected with the employment relationship in exchange for some form of benefit. 


A separation agreement is a contract, or legal agreement, between an employer and employee that specifies the terms of an employment termination.  Like any contract, a separation agreement must be supported by “consideration”.  Consideration is something of value to which a person is not already entitled to – that is given in exchange for an agreement to do, or to refrain from doing, something.


The consideration offered in a separation agreement cannot be something the employee is already entitled to such as a pension benefit or payment for earned vacation or sick time.  Instead, the consideration must be something of value in addition to an employee’s existing entitlements.  Examples of considerations include a lump sum payment, a percentage payment of the employee’s base wage, and/or a COBRA premium payment for a set period of time.


The employee’s signature on a separation agreement, compliance with rescission and waiting periods, and retention of the consideration generally indicates acceptance of the terms of the agreement.


Stay tuned for Part II – When Should They Be Offered?


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