10 Most Overlooked Executive Separation Agreement Clauses – Part 1

Executives in this market are moving in and out of companies with greater frequency.  With the myriad legal claims that an executive could assert against an employer, whether meritorious or not, more companies are opting to give executives some compensation or other benefits on the way out the door in exchange for a release and other post-employment obligations to ensure that the executive will be a “good leaver.”  While the concept of a separation agreement is pretty straightforward, multiple devils can lurk in the details.  Here are the first five of my top 10 often overlooked terms in executive separation agreements.

  1. Termination Date.  It is not unusual for there to be some period between the date an executive is notified of her termination and the actual date that the executive departs from the company.  If the termination date is set well after the notice date, the company may want to consider whether or not it expects the executive to be performing any services for the company, among other things.  Also, there may be considerations related to vesting of equity or retirement benefits that may warrant a later termination date, even if the company no longer wants or needs the executive to be actively engaged in the business.
  2. Earned Compensation Amount.  As part of some executive compensation packages, employees are entitled to cash incentive compensation.  Because any differences as to what was and was not earned by the executive may give rise to claims under wage laws, including a term in a separation agreement stating that (a) there is a dispute, and (b) the parties wish to resolve their dispute without resorting to litigation by compromising and agreeing to a fixed payment, is advisable.  Another related issue is the timing of any earned compensation.  In many states, the last day of employment is the trigger for payment of earned compensation.  So, although there may be a dispute as to what was or was not earned, it may be worth considering an earlier payment of this portion of the separation benefit to avoid possible claims.
  3. Severance Amount.  Although it would seem that this would be the focus of a separation agreement, a surprising number of separation agreement forms that I have seen fail to address the form of the severance, i.e. lump sum or payment over time and type of currency; when severance commences; and who is responsible for paying it (where, for instance,  there is a change of control of the company).  The failure to specify the amount, the timing of payment, and currency could trigger potential tax liability under the Internal Revenue Code, among other things.  Similarly, commencing payment without considering the timing requirements for a valid release and waiver of age discrimination claims, or other contingencies, may result in inadvertently handing an executive cash to use for her attorneys’ fees in a litigation against the company for employment-based claims.
  4. Other Severance Benefits.  Although executive separations are the quintessential example of when “cash is king,” too often the value of non-cash severance benefits is underestimated.  To an executive, continuation of health insurance benefits, a letter of recommendation or introduction to a contact for his next potential opportunity, the ability to keep computer equipment or a mobile phone number, or executive outplacement services can be of significant value and can bridge the gap between the cash that an executive may be demanding and the cash that a company is willing to provide.
  5. Release Language and Exceptions from the Release.  Let’s face it, release language is usually copied from one agreement to the next without much thought as to what is actually stated in the release.  With recent changes in employment laws, it’s best to carefully review the release language to make sure that what a company is expecting to be released actually is released, and nothing that is not permitted to be released by law is released.  For example, releases often include any and all claims related to the executive’s employment “from the beginning of the world to the date of the release.”  Does the release include a release of any equity rights, including those that were granted during the executive’s employment, as compensation for his employment?  In some states, a release is separate and apart from a covenant not to sue, and the distinction may apply to specific types of claims.  It is imperative, therefore, that the executive not only release claims, but also provide a covenant not to sue the company for any released claims.  Recent cases under the Fair Labor Standards Act, the Family and Medical Leave Act, the Massachusetts Wage Act, and the federal and state discrimination laws also require certain carve-outs from the release as well as limitations to release certain class actions or collective actions.

Next week, I will post Part 2, with an additional five neglected terms in separation agreements. (Subscribe to the In-House Advisor Blog to ensure that you receive Part 2.)

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