When An Individual's Employment Must Be Terminated

by James R. Redeker, Esq.

Often, particularly in the U.S., it is how, not whether, an employer terminates the employment of an employee which causes the most trouble/liability. This summary is intended to identify, without detailed discussion, the most significant issues which must be considered when structuring the termination of employment process and how those issues can be resolved most favorably for the employer.

The Risks

In general, there are ten risks or sources of potential liability which need to be neutralized to the extent possible in the process of discharging an employee from employment. If each of these risks is neutralized, an employer will nearly eliminate any potential liability to the former employee (and, perhaps others) arising out of the termination of his/her employment:

• claims based on the basis for the decision to discharge
• claims based on how the discharge is carried out
• disparagement of the employer to third parties and/or to other employees
• release or use of the employer's confidential information
• destructive competition by the discharged employee
• retention of the employer's equipment and/or other materials of value
• destruction of the employer's equipment, property and/or data
• damage to the morale of the employees continuing after the discharge
• physical harm to others by the discharged employee
• emotional trauma to the employee

The first six of these risks can be minimized or eliminated with a well drafted separation agreement.

Separation Agreements

The construction of a separation agreement can be divided into three segments:

• 1) what the employer gets
• 2) what the employer has to give, and
• 3)enforceability protections. This outline will deal only with the first two.

Nine Things An Employer Should Get In A Separation Agreement:

1.Release from liability for the decision to terminate the employment.

Often employers voice reservations about requesting a release from liability from an employee at the time the employee is discharged for fear that the request will show weakness and induce the employee to file a claim. This concern, while honestly held, is often irrelevant. After all, if the employee signs the release, who cares whether he/she thought the request came from a fear of a claim or fear that the discharge violates some enforceable right of the employee?

One method by this concern can be alleviated is to make the use of releases commonplace. A severance plan which contains a requirement that a release be signed before any benefits are paid can achieve this objective. Since a severance plan should provide benefits only for those whose employment is terminated for reasons other than misconduct, it is rarely available, by its terms, to employees who are discharged. However, employers can provide in their severance agreements that, for consideration, the employee can be provided the benefits of the severance plan, which, of course, would include the requirement of the execution of the release.

In drafting a release, the following general principles must be borne in mind:

• a) a release cannot preclude future claims. Consequently, where the employer chooses to permit the employee to continue in the workplace for a period of time following the execution of a separation agreement containing a release, the employer must consider whether to have the employee sign a second release at the time the employee leaves the workplace. This second release would cover events between the first release and the last day worked, e.g., harassment.
• b) a release will be ineffective as to certain statutory claims, e.g., claims bases on violations of the Fair Labor Standards Act.
• c) a release should include claims which may be unknown at the time the release is executed.
• d) the Older Worker Benefit Protection Act's requirements must be included in the agreement, if the discharged employee is over 40 years of age and the employer wishes to be released from potential liability for a violation of the Age Discrimination in Employment Act. Even where an employer does not need or care to be released from the ADEA, an employee should be given reasonable time to consider whether to sign the agreement. Failure to do this may result in the invalidation of the release.
• e) a release from any claims arising out of the investigation leading up to the factual conclusions on which the discharge decision was based, including negligent conduct, invasion of privacy, defamation and malice.

2. Release From the Manner With Which the Discharge Process Was Conducted:

Increasingly, we are finding claims being filed based on how the discharge was carried out. These claims include charges that the discharge process was demeaning, embarrassing or defamatory. A well drafted release, therefore, should include possible claims arising out of the discharge process itself.

3. Agreement Not to Disparage:

An employer may wish to prohibit a former employee from disparaging the employer, the employer's business/product and/or employees. In those cases, an employer should get from the employee a non-disparagement pledge as an essential part of the severance agreement. Enforcement of such pledges are always of concern and, unless the agreement contains "self-enforcement" provisions (discussed below), non-disparagement pledges would have to be enforced through equity or by the return of the money consideration or liquidated damages. The method of enforcement usually should be selected and constructed at the time the agreement is drafted. Where an employee demands mutuality in the non-disparagement clause, employers should take care to avoid being over-broad in their pledge. While an employee has a limited number of persons to monitor with respect to statements about an employer, an employer usually cannot possibly monitor and control everyone in its organization with respect to what may be said about the former employee. For this reason, employers should limit their obligation to a few specified individuals or classes of employees who can be controlled, e.g., officers, managers, supervisors.

4. Confidential Information

The confidential information of an employer generally is protected by the applicable common law of the state and confidentiality pledges in a severance agreement are technically unnecessary in most cases. However, where an employer has a concern and protectable interest, it is generally recommended to obtain from the employee an agreement which, if nothing more, identifies the type of information which both the employer and employee stipulate is meant by them when they use the term "confidential" or "proprietary." For this agreement to be meaningful to a court being asked to enforce the pledge, the definition should not be over-broad and meaningful with respect to the particular employee.

5. Non-Competition

Unlike confidentiality pledges, protection from competition by a former employee is a product of contract, the enforceability of which may vary significantly from jurisdiction to jurisdiction. In most jurisdictions, some reasonable restrictions on competition will be enforced and employers with this concern can and should get them in a severance agreement, either by way of affirmation of a prior commitment or by way of new covenant. Indeed, even where an employer believes it already has an enforceable covenant not to compete, it is wise to obtain the reaffirmation of the commitment in the severance agreement, thereby avoiding subsequent challenges to enforcement based on a theory which the reaffirmation will destroy.

6. Disposition of the Employer's Property and/or Equipment

It is common these days for employees to be provided laptop computers with substantial data on their hard-drives, on disks, or accessible and available for downloading by modum. This type of equipment is in addition to the other property and equipment of the employer which an employee may have at the time of the discharge. The severance agreement must treat how that equipment and/or property will be handled. Will the employee be allowed to keep it as part of the consideration and, if so, what about the information which may be stored in the memories of computers. Agreement with respect to these issues is something the employer must get in writing and not leave to "expectation" or "good faith," unless it wishes to test the viability of replevin actions in their jurisdiction. While the hardware may be part of what an employer may give to buy a release, the software and data rarely should be. The severance agreement should take care of these details. In most cases, the satisfaction of the return of equipment/property provision will or should be a precondition either to the effectiveness of the offer or of giving any other consideration.

7. Non-Disclosure of Terms of the Severance Agreement

Most employers do not want either the fact that it paid something to an employee who was fired or the terms of the agreement publicized to other employees. While as difficult to enforce as non-disparagement pledges, confidentiality agreements are still worth having for their "intimidation" or "preventive" factor.

8. Agreement Not to Reapply

If an employer gets rid of an employee and buys peace from potential liability for the reason for the discharge, it should not have the same type of liability raised in the form of a failure to hire case the next day. For that reason, an employer usually should demand that the employee, once discharged, not attempt to require employment with the employer (or any related entity) at any time in the future. This agreement is generally in the form of authorizing the employer to reject the application of the employee on the basis of the agreement and for no other reason.

9. Hold Harmless From/ Indemnity of Tax Liability

The taxability of settlements in this context largely has been settled, although the withholding obligations of an employer are still a subject of frequent debate. Prudence dictates that one thing employers should get from a severance agreement is a pledge from an employee either to hold an employer harmless from tax liability and penalties (if not prohibited by public policy) or to indemnify it in the event the taxes are not paid by the employee or the IRS asserts that taxes should have been withheld but the employer was pressured by the employee to issue only a 1099. As a rule, employers tend to shy away from hold harmless provisions in favor of a commitment to indemnify the employer not only for the tax and penalties but also the cost of defense. Most employers would not want to rely on the employee's counsel to defend it.

Ten Things an Employer Has to Give to Get a Separation Agreement

Severance agreements and releases must be supported by adequate consideration. Many things can constitute consideration, and most have little or no cost. Having these "no-cost" items as part of the consideration makes it possible for an employer to have "adequate" consideration for less money and otherwise may be expected. Listed below are ten kinds of consideration which an employer has within its capability to give with which to "buy" peace.

1. Money

We certainly have to start with the usual form of exchange -- money. But money consideration in a severance agreement can come in many forms, each form being chosen for its special effect or value.

Since most employers feel morally uncomfortable terminating the employment of an individual without any severance pay at all, except that which comes as consideration for signing a severance agreement, the payment of something to an employee without expecting anything in return (except, perhaps, the return of equipment) is common. The line between the amount given to assuage the employer's conscience and the amount which should not be paid unless it is buying peace is what one of my partners calls the "chump" line. Loosely defined, the chump line defines the point at which the employer would feel like a chump if the recipient sued on a claim which could have been released. Any amount over that line should buy something of value.

The amount of money necessary to purchase the employee's signature varies in each case and by circumstances, including how many other things of perceived value are also included. Note here that payments to which the employee would otherwise be entitled (e.g., unpaid wages, vacation pay, vested benefits, severance pay pursuant to a plan which does not require a release) will not be consideration for a severance agreement and good drafting will not have these payments included in the paragraph dealing with consideration. As with all other things in commerce, the right amount generally is the amount which the employer is willing to pay and the employee is willing to accept to enter into the agreement. However, where the amount appears paltry, the additional items detailed in later sections become more necessary.

The money consideration can be paid in a lump sum or over time. If paid over time and depending on the type of employee, it may be important to provide that the payments will be made "as if" the employee were still employed rather than just to continue the individual on the payroll. Someone still on the payroll may be confused by others as still being employed, to the detriment of the employer. Paying a former employee over time makes the agreement self-enforcing for the length of the period of the payments. That is, if the employee disparages the employer, releases confidential information, reveals the details of the severance, or does anything else in violation of the agreement, the employer can suspend payments. In creating this possibility, however, the drafter must take care to ensure that the suspension of payments due to a breach of the agreement will not void the effectiveness of the release.

The agreement must provide for taxes. That is, the money consideration usually is stated as a gross amount minus taxes. Only in rare cases can the consideration be paid as non-taxable or without, at least, the issuance of a 1099. In this respect, an employer should, may wish to, or may be forced to consider separating the money consideration into several different categories, each with different tax or withholding requirements, e.g., payment of attorney"s fees, payment of medical costs, payment for emotional damages, payment for physical injuries, lost wages.

2. Insured Medical Benefits

Most employees who have their employment terminated are entitled to the benefits of the Consolidated Omnibus Reconciliation Act (COBRA) and may have their group insured medical benefits continued at their own cost plus a small administration fee for eighteen, and in some situations, for twenty-four months. These benefits can be denied to employees terminated from employment for willful misconduct. Denying an employee who is being terminated for reasons which would result in ineligibility for COBRA benefits and then allowing the employee to exercise COBRA rights as part of a severance agreement converts those rights into consideration in support of the commitments in the severance agreement, including a release.

If an employer does not wish to appear heavy handed by even threatening to refuse a former employee his/her COBRA rights, the payment or reimbursement of the employee's COBRA expense for some period of time is, on balance, a form of consideration which is more valuable to the former employee than the cost to the employer. In leveraging consideration in this way, employers are cautioned not simply to agree to continue the employee in the Company's group plan (perhaps deducting the employee contribution from the severance pay). Most group insurance policies will cover only employees who are active and who have exercised COBRA rights. Consequently, a terminated employee will not be covered by the insurance, unless the employee exercises his/her COBRA rights. If the employer simply continues the former employee in the group plan without having the employee make a COBRA election, the employer risks that the insurance carrier will disclaim coverage and the employer will be found to have self-insured. Murphy's Law dictates that such disclaimers will occur only after the former employee suffers an extraordinary medical expense. To avoid this problem, the consideration must be stated clearly that the employer's obligation is only to pay or reimburse the COBRA amount.

3. Attorney's Fees

Where an employee has retained an attorney, a valuable kind of consideration is for the employer to agree to pay the employee's attorney's fees. Doing so may not only be preferred by the employee, but also be a cost saving to the employer. Attorney's fees would not be income to the employee. Consequently, by paying attorney's fees separately, the employee will not have to report the amount and then back it out on his/her tax returns. Further, because the amount will not be considered wages, the employer would not have to pay the employer's payroll taxes on this portion of the consideration.

4. Equipment

As noted above, employees often have in their possession computers and other equipment belonging to the employer. Permitting the employee to keep this equipment may be more value to the employer than its cost to the employer. Of course, where this form of consideration is used, the employer must ensure that its information and other things which may be attached to the equipment is protected.

5. Resignation

Often an employee would prefer a cosmetic resignation to being fired. Permitting the employee to resign has little, if any, downside for the employer. It also should not prevent the employee from receiving unemployment compensation (if the employee is otherwise eligible), since the resignation would have been forced. The cost to the employer is nothing. The value to the employee is substantial

6. Reference

Often forgotten in these situations is that one of the best protections for an employer is that the former employee gets another job. Consequently, helping the employer get that next job by giving him/her a positive reference may produce a value far greater than normally attached to it by the employer, which frequently sees it only as a face-saving device for the employee. To be sure, in a few specialized circumstances where the employee may constitute a physical danger to others, a former employer may be held liable for not responding honestly to a request from a prospective employer for a reference concerning a former employee.

Even where the employer does not wish to provide a positive reference, a neutral reference still may be viewed by an employee as something of value, simply because it is not negative.

Finally, getting the employee to agree in the severance agreement to the actual wording of the reference will go a long way to avoid subsequent defamation claims. If that purpose is to be achieved, however, the employer must take care to ensure that the severance agreement limits the persons to whom a reference can be directed, that the internal procedures of the employer are such that only those who know what they are doing respond to reference requests, and, very importantly, that compliance with the obligation can be proven.

7. Outplacement

Outplacement services to assist a former employee in getting a replacement job can be expensive, but, if successful, may be worth every cent. Moreover, there may be significant psychological value in using outplacement as a means of expressing "good will" or lack of rancor toward the employee, thereby moderating the employee's desire for revenge. Because outplacement services come in many kinds and for many different prices, employers should investigate the market fully and specify precisely what is to be provided. On occasion, an employer may wish to offer only that it will reimburse the former employer up to a specified amount for outplacement or job search expenses. On these occasions, the employer invites the employee to request that the amount be given to him/her outright in lieu of outplacement services. If that occurs, the employer must weigh the fact that the amount will be paid if converted to cash against the possibility that it will not be expended at all because no reimbursement will be necessitated. As noted later, a counselor may be used during the discharge process to minimize employee trauma. This counselor may be part of the outplacement service and an excellent transition into that state for the employee.

8. Counseling

Occasionally, the cause for terminating the employee indicates that the employee has a problem which may be helped by psychological or other therapy or counseling. There are also occasions when the discharge itself is so traumatic that the employee could benefit from such activity. Finally, the control of a former employee's desire for revenge after being fired may be of substantial benefit to the employer. All or any one of these situations may recommend an agreement for the employer to pay for counseling or therapy for the employee.

9. Access to Voice and E-mail

A former employee's dignity is preserved and job search activities may be substantially enhanced by enabling him/her to have continued use of voice and e-mail, as a modern-day substitute for an office. This access can permit the former employee to appear to be employed, at least for a period of time beyond the date of actual discharge. This access can be limited by an employer's ability to monitor the calls to ensure that the employer's business is not affected adversely. By offering/agreeing to this continuing access, the "ogre" factor can be reduced for the employer, moderating again the employee's desire for revenge.

10. Unemployment Compensation

While an employer does not decide whether an employee will be entitled to unemployment compensation, it can agree not to contest the employee's eligibility. A no-contest agreement can mean everything from not responding to the state's request for information to a response that the employee was not terminated for an act of wilful misconduct.

Neutralizing the Other Four Risks

Destruction of Property/Information

Part of the structuring the discharge process is planning for the protection of the Company's property and information. This planning is critical because current technology makes mass destruction and mischief possible in a very short time. Planning includes the time of day the discharge will take place and what will occur during the time the employer's representative is meeting with the employee. We recommend to our clients that, prior to conducting the discharge conference, a list should be prepared detailing what information and equipment may be in the possession of or to which the employee may have access. For each item on the list, a method is devised which will result in the protection and preservation of that item.

Unless there is a specific reason for acting some other time, most discharges should take place at the end of a day prior to a time when general access to the office will be most easily controlled (prior to a holiday, weekend or other time the workplace is likely to have less activity). The other most advantageous time is at the beginning of a day after which there has been sufficient time to take the actions necessary to protect the employer's equipment/information. Choosing the end of a day option is preferred because there is less of a possibility of a claim that the discharge process was demeaning to an employee or, itself, was defamatory because fewer people would be around at the time the employee leaves the workplace after the discharge. Further, because there is temporal distance between the time of the discharge and the next work day, there is a reduction in possible rumor mongering. Finally, if the employee who is discharged is managerial and his/her office is to be locked down, pending segregation of property and downloading of data, claims of defamation and invasion of privacy may be avoided if this activity can be completed when the workplace is otherwise vacated or less populated than on a regular work day.

During the discharge conference, the employer should have its technical or other skilled personnel secure all information and other property to which the employee normally has access. The objective is that, while the employee is occupied by the discharge conference, security precautions can be completed.

Upon completion of the discharge conference, the employee may be allowed to retrieve his/her personal items at that time or, preferably, a time when others may not be present in the workplace is set when the employee may return to pack and take personalty. Obviously, the employee's packing should always be observed. It may also be necessary to provide transportation to the employee if a Company car is confiscated, to provide for accompanying the employee home or to some other place where the employee may have Company property, and to obtain possession of pass cards, keys and other like property in the possession of the employee

Damage to Morale of Survivors and Customers

Other employees and customers may have reactions which need to be anticipated and dealt with. Also, the employer must protect against negative statements and conduct by the former employee which may damage the morale of other employees or relationships with customers.

Initially, the employer should make any offer of severance or other post employment benefit contingent on the discharged employee's proper conduct subsequent to the discharge conference. In addition, in some cases it is recommended that the employer and employee agree during the discharge conference itself to what will be said to other employees and customers with respect to the employee's departure. Finally, it may be appropriate to provide a "cover" for the absence of the employee from the workplace while considering whether to accept the severance agreement which is offered. This cover may be a personal leave of absence, vacation, business trip or some other reasonable explanation. Such a device may be helpful in avoiding claims of defamation later, as well as containing adverse reactions in and outside the workplace. Any such agreement -- whether statement or cover -- should be in a writing signed by the employee.

A significant problem occasionally occurs over how an employer may respond to destructive rumors or negative reactions in or outside of the workplace concerning or resulting from the discharge of an employee. Such conduct can exacerbate union organizing or send employee morale into a tailspin, as the employer is charged with generalized unfairness or lack of compassion. In these situations, there may be a conflict between what employees perceive to be the reason for the discharge and truth. Moreover, the truth may be something the employer and employee may not wish to publish, e.g., commission of a crime, dealing in pornography, misappropriation of company property, breach of fiduciary responsibility.

While there is no law which would prevent an employer from telling the truth to quell salacious rumors or negative comments, claims by the discharged employee of defamation can result. In addition, the discharged employee may be unnecessarily held to ridicule and other employees may fear that the employer may likewise reveal facts about them which they would like to keep confidential. Caught on the horns of this dilemma, employers have to do the best they can and many choose to allow the rumors to exist rather than risk the downside effects of telling the truth. The choice is much easier where the employer has developed a good and health relationship with its employees and the employer's managers are held in high esteem and have credibility. Surviving employees and customers of such employers are more ready to assume fairness and give little credit to negative rumors. Of course, where the employer's credibility is already in question, the rumors may have greater popularity and appeal.

Bottom line, while the employer may do some things to protect itself at the time of and following the discharge of an employee to protect itself against a loss of employee morale and customer relations, the most effective protection is to have built a healthy and trusting relationship with the employees and customers before a discharge ever is considered. When needed, these relationships will pay dividends and the aftermath of a difficult discharge may be just that time of need.

Emotional Trauma

Employers should always anticipate and consider how to take advantage the emotional trauma of a discharge. At the very least, the employee will be unable to focus to any significant degree on what is going on beyond the fact that they are experiencing economic capital punishment or disaster. From time to time, the employer also must anticipate that the employee will be unable to deal with the termination of his/her employment in an emotionally stable fashion.

The positive handling of the emotional dimension of a termination conference brings to focus the issue of who should be in the room representing the employer during the time an employee is having his/her employment terminated. We recommend that the employer should always have a second person in the room on its behalf, whether that person is the direct supervisor of the employee being discharged, a member of the human resource department or other trusted "witness." Where the employer is prepared to provide assistance to the employee in obtaining replacement employment, the second person can be a representative of the outplacement service and that person can immediately begin the process of redirecting the attention of the employee away from the present and to the future. Where the employee is anticipated to have an extreme emotional, but non-violent, reaction, the second person should be a mental health professional who can assist the employee in dealing with the present and begin the refocusing process on a different level.

Physical Harm by the Employee

Unfortunately, violence is no stranger to the workplace and reports of angry former employees returning to the workplace to harm supervisors, managers or co-employees all too frequent. In cases where the employee may constitute a threat of violence, particularly where the employee is being discharged because of a violent act or threat of violence, the employer should have as its second representative someone trained in handling violent acts, such as a security employee, an outside security person or a police officer.

In addition, where it is possible that the discharged employee may commit a violent act after the discharge conference is completed, the employer would, in many jurisdictions, have an obligation to provide adequate protection of employees when they are in the workplace. In spite of local or state laws, there is some suggestion that this protection also would be required by the general duty clause of the Occupational Safety and Health Act. In these situations, we recommend that the employer follow its normal Violence Control Program (do you have one?) and follow the advice of the experts it has identified and retained in connection with that Program.

The Process of Getting What You Want -- An Employee Willing to Sign a Separation Agreement Containing a Release

Having created a severance package and Separation Agreement, the final question is how do you structure the discharge process to get the employee to sign it. Clearly, the presence of a counselor at the discharge conference itself will help. In this respect, the Separation Agreement becomes part of the refocusing process and the counselor can use the agreement to reduce the ogre factor. There are other things which also can be done.

It has been our experience that employers pay more than necessary to get a separation agreement when an employee is offered the agreement at the outset of the discharge conference. The employee must first experience for even a few moments the reality of economic prostration. Where the employer first puts an employee "in extremis" economically and emotionally, not only is the agreement's consideration enhanced but also the possibility of getting it signed materially improved.

For these reasons, the recommended process is to tell the employee that his/her employment is being terminated with little or no severance or other economic provision to bridge the person to replacement employment. After the reality of this personal, economic Armageddon takes hold, the employer makes an offer to provide that bridge -- the Separation Agreement. If the employee will sign the agreement, the employer's representative says, the employer will provide various things to assist him/her through the difficult times. The employee is given an opportunity to consider what to do. This contemplation period, however, is still in the context and against the backdrop of the reality which the employer had flashed before the employee ever so briefly, but ever so effectively, during the discharge conference.

Conclusion

With pre-planning, an employer may reduce its exposure to liability arising out of the termination of the employment of an unwanted employee. When an employer approaches the discharge process with an intent to avoid all reasonably anticipated problems, it will consider the issues raised in this memorandum. All that is left, then, is the unpredictable and bizarre. Against them there is only resolve, courage and an adroit mind.

For further information please contact us.

Disclaimer

The ideas presented in these materials are general in nature and not intended to be contstrued as legal advice and cannot be relied on by any person or entity as legal advice pertaining to any specific situation.