Understanding Separation Agreements

Anita Brick: Hi, this is Anita Brick, and welcome to CareerCast at Chicago Booth. To help you advance in your career. Today we're really delighted to be speaking with Jon Vegosen. And Jon is a founding member of Chicago corporate and litigation law firm Funkhouser Vegosen Liebman and Dunn Ltd., where he was co-managing partner for many years. And Jon, I love this about you.

Jon firmly believes in the importance of helping clients avoid and solve problems and earning their trust, especially by taking a preventative and proactive approach. He is widely known as the consummate, caring, and responsive lawyer that clients value. Thank you for making time for us. I'm honored to be here today. I'm glad. Glad may be an odd word, but I know that in the environment that we're in, separation agreements can come.

People get put on performance plans because the market has tightened. I want to demystify this. I know you're not giving legal advice. Of course, but we'll have a conversation and maybe you can point us to some things that we should know.

Jon Vegosen: Of course.

Anita Brick: Okay, great. So let's jump in. First came from an MBA student and he said, my company is in the midst of a major restructuring, and the word is out that there will be a document to sign to sever employment.

I've done some research and separation agreements are not all the same. What are some key elements of which I should be aware?

Jon Vegosen: Just to be clear, an employer may terminate an employee's employment without offering an employee a severance agreement or severance pay. And this indeed is because a law requiring severance pay or a prior commitment on the part of an employer does not necessarily exist in most places.

So that's the first thing people have to understand. But the person who asked this question is correct, that not all separation agreements are created equal. They can vary depending on factors such as, say, the reason for the termination, how many employees are being let go, the financial strength of an employer, the generosity of an employer, the goals of an employer, and the leverage that an employee may or may not have with the employer.

The length of time an employee has been employed by the employer. Another key element is that an employee doesn't always have to sign a separation agreement as presented. If an employee is not comfortable with the terms of the separation agreement, say for example, the agreement includes restrictions like non-competition or non-solicitation provisions that would affect their future employment prospects.

Well, the employee is able to forgo the severance pay or other benefits that are offered, can just simply decline to sign. Depending on the circumstances and the leverage, an employee may also want to consider negotiating for more favorable terms.

Anita Brick: Another MBA student asked, he asked, what are some key things that people miss?

Jon Vegosen: Well, let's first talk about the kinds of things that are typically in a separation agreement.

One would be the effective date of the termination of employment or the date of resignation, if it's structured as a resignation. Usually, an employer wants to have an acknowledgment that the person has been paid all that is owed to them, or it's their salary, their bonuses, their earned and unused vacation days, their expenses through the termination date. Employers like to have a representation and warranty by the employee that they have returned all the employer's property, and if they haven't sabotaged their computer system.

One of the most important things an employer wants to have is a general release of all claims, including employment and termination-related claims by the employee. What goes hand in hand with that, Anita, is a covenant or agreement not to sue the employer for any release claims by the employee. [Inaudible] the employee’s agreement to maintain the confidentiality of the employer's confidential information in their trade secrets.

And often an employer wants the employee's agreement not to disclose the terms of the separation agreement to others. And then there are post-employment agreements or covenants like the non-compete and non-solicitation. Often non-disparagement restrictions and cooperation restrictions or requirements and transition assistance, say, with respect to pending matters that they've been working on or litigation. Another thing that employers ask for is an agreement not to file for re-employment with the employer.

And usually, if an employer is going to have anything about references in an agreement, then the employer is probably just going to give what's known as a name, rank, and serial number reference because they don't want to expose themselves to a risk of defamation.

Anita Brick: Okay, so let me pause there for a second.

Jon Vegosen: Sure.

Anita Brick: One thing that you said was to not apply for re-employment. Having spoken to a lot of people over the years, if it is a layoff wasn't because of performance, it had to do with other things. It's not always true that a person can't be re-employed. How does someone find out whether they're eligible for re-employment or not? How do you know unless it says explicitly in any termination agreement whether or not you are eligible to be rehired?

Jon Vegosen: And I would say that unless the agreement says you can't apply for re-employment, you should assume that you can't. And often employers will want someone to come back. But let me give you the reason why employers ask for this, particularly in a termination that's going to be final. And the reason is this: when the anti-discrimination laws were passed back in the ‘60s, an employee might six months or a year later, apply after having been laid off or terminated. And the employer would say, no, I'm not going to do that. And then the employee would sue and the employer would trot out the release and say, well, you can't sue me because you released me. The employee's lawyer would say, not true. The release only goes up to the date you signed the agreement. This is a new claim. What happens is is employers who don't want to get sued for not rehiring someone. Well, put in their separation agreements that the employee waives the right to reemployment. To get around that problem with respect to the release. And that's where I see it, and that's where I use it sometimes when I represent employers. And when I represent executives, I try not to have that clause in there.

Anita Brick: Got it. Two things. These days, if you call some of the global companies, they'll tell you start date, end date, and is the person eligible to be rehired. You think that needs to be cleared up ahead of time?

Jon Vegosen: I think from the executive or employee standpoint, it's a great thing to clear up because if they are eligible for rehire, that's a great thing to be able to say and tell a prospective employer and then have it be verified.

Also, you may want to go back to that employer. Maybe there it is. Truly economic issues and nonperformance. And so you want to get clarity on that. I think it's a great question for an executive or employee to ask.

Anita Brick: Okay, good. Another Boothie said I didn't sign a non-compete agreement when I joined it. There is a section in the separation agreement that is in effect, adding one after the fact. But again, you said you don't have to sign it at all. You don't have to sign it intact. I mean, it sounds like to me, not being an attorney, but it sounds like to me that if you didn't sign it before, it's kind of hard for the employer to make you sign it after you've been terminated, unless you get some other compensation for doing so.

Jon Vegosen: I think your analysis is pretty sound, Anita. It is not atypical that an employer will ask the employee to sign a non-compete, or a non-solicit only at the separation time. Most employers, though, get these things upfront. Before they hire somebody, they put those kinds of provisions in. But what can happen is employers who were providing employees with, say, very meaningful severance pay sometimes decide that they're unwilling to offer the pay unless the employee agrees not to compete.

And then an individual who is faced with that situation has a few options. He or she can decline the offer, and the employee can try to negotiate a limitation of the non-compete agreement or its length or scope, and try and narrow it, or the employer can agree to the non-competition restriction and seek employment in a non-competing industry or profession.

And it really depends on, I think, what the employee or executive wants to accomplish. If the money isn't very good, let's say it's a couple of weeks pay and you're faced with a non-compete I'd say don't sign.

Anita Brick: I heard that pretty much anything in an agreement like this is negotiable. And I've heard some people just, I want to just get done with it. I want to just get my head out of this. And other people I've seen negotiate aggressively and get nothing. And other people who did it a little bit more human to human were able to negotiate a lot of things.

If you think about negotiating, at what point do you do that? Do you do it when it's first presented to you? Do you see that it's more effective if you take a bit of time? Give me a day or two. I want to read this through. I want to really understand everything. May I come back to you with questions? At that point, is everything on the table to negotiate or it really depends on the situation?

Jon Vegosen: Well, I'm going to give you the answer that most lawyers give to most questions, Anita. And the answer is it depends.

Anita Brick: Economists do the same thing. Who’da thought? Right?

Jon Vegosen: Right. Who’da thought? I think you catch more flies with honey than you do with vinegar. And so my suggestion would be to take sort of a high win-win road rather than a win-lose approach.

One thing you have to bear in mind is that when an employer has to terminate the employment of an employee, it can be very distasteful and uncomfortable for them. So when an employee approaches things in a somewhat upbeat and win-win approach, that's amicable. Some of those employers are relieved. And so when an employee comes along and asks for some accommodations, they're more willing quite often to be reasonable and acquiesce to some of them.

My advice would be to remember that there can be a lot of emotions that come up when you get fired, or you get presented with a separation agreement. There can be anger, fear, uncertainty, and a loss of self-confidence. And so what you need to do is compose yourself. You need to perhaps get an attorney or someone who is skilled in this arena to give you some advice and then go back in an organized, calm fashion. Have priorities about what you want to ask for and what you don't want to ask for. See what you can get.

And some employers will be flexible. I've been representing some of late who we've been successful in getting a number of things that we want. There are other employers, though, who take a hard line. They go, if I do it for you, I've got to do it for everybody else. I'm not budging an inch. Take it or leave it. I would love to give you a definitive answer, Anita, but it depends.

Anita Brick: What my takeaway from this is: ask for some time, if someone pushes you to sign it in the moment, that's really not reasonable. You get a little bit of time. You ask for 24, 48, whatever, 72 hours, whatever you want. Think about the priorities and maybe even remember the value that you contributed and the value that you've gained for being an employee there, because it might shift your mindset. And then you approach things based on where you know your priorities. You know what's easy to give up. What really is important to you and approach it in, like you said, in an amicable way to the degree that you can and maybe even find someone to talk to you to help you manage the emotions.

Jon Vegosen: Exactly. This is to say there are times that you bring out the hammer. For example, if you've got really good evidence of discrimination, say, pregnancy discrimination or race or harassment or something like that. Being nice isn't getting you very far. You may need to bring out the discrimination card and say, look, you're leaving me with very little choice if you're not going to be flexible, I'm going to have to file a charge or a lawsuit. I don't think that's good for either of us. So let's work this out. But you need to be reasonable. Though sometimes you have to escalate it.

But I do want to mention one thing. Most employers aren't going to only give you 24 or 48 hours or say, sign here on the dotted line, at least sophisticated ones. They know better that that looks coercive. They're going to get a bad reputation if they do that. The other thing is there is some laws out there where employers are required and needed to give employees, sometimes 21 and sometimes 45 days to consider an agreement. And then also they have an opportunity to revoke the agreement after they've signed it. They do it within seven days.

Anita Brick: Wow. Yeah. No, I think that that's important. Thanks for mentioning that, Jon. I would guess, and they could certainly look this up. It might depend on the country since this is a global audience and within the U.S. it might depend on the state. There are a couple of questions. One was a student and one was an alum related to signing. An MBA student said, what are the implications of my signing a separation agreement on my future employment, either inside or outside of the company, since I was laid off because of a downturn versus terminated for cause?

Jon Vegosen: The fact that you signed a separation agreement is not necessarily a bad thing at all. I think it's probably a smart thing if it's a good package for you. I would say no, but you could get into a situation of there are some employers who offer what we call voluntary or early retirement separation agreements, and there could be implications for those kinds of packages.

Anita Brick: Let me ask that question. She said my company is offering voluntary separation. What are the implications of packages like this that I need to consider, not just for now, but for future employment? So clearly that is on the mind.

Jon Vegosen: I think that the implications for now, as opposed to the future, are similar to some of what we've already discussed. You have to do a cost-benefit analysis of whether you're going to be better off or worse off, for having taken the package, and what would happen if you decided not to take the package. If you were going to be laid off anyway, aren't you better off taking the voluntary package if it's coming down the pipe?

With respect to implications for future employment, you might have to think about what you will say if you are asked, did you take a voluntary separation package and why? A future employer might be reluctant to hire someone who took a voluntary separation package and view the person, rightly or wrongly, as someone who's not interested in working hard or a future employer might be quite willing to hire someone who took a voluntary separation package and view the person, rightly or wrongly, as flexible and as a team player.

And so we really don't know how the answer is going to play. Think through what are you going to say when you share that you took a voluntary separation package? And what will the impact of what you say beyond the prospective employer?

Anita Brick: And that's a really good point, because I remember this a few years ago, it had to do with things related to the pandemic, and I had a long conversation with a Booth alumna who was offered actually a super generous package and was concerned about it.

And I would love to get your take on this. I said to her, most employers want to know that you have thought it through and that you made a conscious decision rather than let it happen to you. And the thing that happened, interestingly, she did give herself some time to think and explore, and she ended up landing a position that she is still in with several months of compensation still left on that package.

But she was very, very specific about how she thought about this long and hard. That seemed to work out pretty well.

Jon Vegosen: Here's how I would look at it. As someone who might be hiring someone, then that person makes decisions, I want to be sure if I'm going to hire them that they make thoughtful, rational, reasoned decisions that they take into account the pros and cons, and that they've made a good decision, because that's what I want them to do if they were my employee. Yeah, I totally agree with you about that.

Now, the one caveat I want to share with you and your listeners is separation agreements often have confidentiality provisions. Employees sometimes are prohibited from even mentioning that they have a separation agreement, let alone what's in it. And so they have to be careful about what they say because they may forfeit their benefits.

Anita Brick: Very, very good point. Jon, do you have time for one more question?

Jon Vegosen: I do.

Anita Brick: Okay, awesome. So when we have our conversations with CareerCast, we kind of like to wrap it up with some concrete, actionable things that listeners can do. What are three things that you would advise an individual to do who received a separation agreement to sign, especially if it was unexpected?

Jon Vegosen: I think the first thing is I would say is take a deep breath. You're probably getting hit right between the eyes. But the first thing when I say take a breath, Anita, I mean is one should try to contain one's emotions, you know, whatever they may be, and try to focus yourself on determining what the agreement provides and does not provide, and what the best course of action is moving forward.

I also think an individual should carefully read the agreement several times to make sure that he or she understands it, and to make notes of those things that are not clear. That's part of that decision-making process. And then I think that the individual should probably engage an attorney to review the agreement and answer their questions and guide the individual about what the agreement covers and doesn't cover, and give them advice about what realistically can be negotiated. An employee may not understand all of the provisions in the agreement and their implications. And when one loses one’s job, it is so challenging emotionally, and it's very useful to have an attorney who can advise the employee in a reasoned way.

The other thing is, is an employee may have claims against the employer that are far more valuable than the offer contained in the separation agreement, and the employee may not be able to weigh those or really consider or factor those.

And I know you only asked for three, but I'm going to give you the fourth one that I always give to an executive or employee I represent. And it's because they are going to have those emotional reactions. I tell them, although you may not currently have a position, your talents go with you and don't ever forget that. And I always get thanks for saying that, because this really helps lift an employee's spirits and confidence and thereby helps the person move forward positively.

Anita Brick: I totally agree because someone can't always think straight when they've just been told they're not needed anymore, and in whatever context that is. And with jobs and careers and the more senior someone is, the more difficult that can be. So I think that is very sage advice. Thank you. Anything else, Jon?

Jon Vegosen: Well, first of all, I've really enjoyed this conversation that we've had, and I thank you again for inviting me. And I hope that what I've had to share is going to be useful to your listeners, and I hope none of them get laid off.

Anita Brick: I agree, Jon. Thank you. I think you gave us some very practical and actionable things to do. And also you did it from a place which was in your bio, from a very humanistic, compassionate heart. And that is so important to find someone who will listen and someone who cares enough to remind you the way you did that, just because this happened doesn't take away your skills and your knowledge and your talents. Those are still there and sometimes the fit is just wrong. I just had one more thing that I think your listeners would like to hear.

Jon Vegosen:  Of course. Because you had asked me this and then we got sidetracked and I didn't really answer the question of what are some of the things you might want to ask for if you're in a negotiation? And what I wanted to just do is just give you a little checklist of what those might be. For instance, you can ask for more money, for more severance pay.

Secondly, often employers will pay you over time because they want to keep you on a leash, and sometimes it's better to try and get a lump sum so that the employer doesn't have that power over you. Other times, it's actually good to take it over time, because maybe you can spread the payments over two tax years. Employers are going to ask you as an employee to release them of all claims. And you as an employee may want to try to have the employer release you of all claims that they have against you. So you may want some mutuality there.

Another thing to think about, Anita, is what's called an indemnification clause. And basically what that means is suppose an employee is falsely accused of discrimination or a fraud or something like that. The indemnification clause would provide the employee with a lawyer that the employer would pay for, and provide that the employer would pay for a settlement or a judgment involving the employee, unless the employee did something really bad. But employees don't generally have the resources, let alone the insurance, to back it up to defend themselves. If you don't have an indemnification clause, you may want to try to renegotiate for that in a separation agreement.

I do like employees to try to get a favorable reference and have it part of the agreement or attached to the agreement, so everyone has agreed upon what's going to be said. Again, I think if you've got post-employment restrictions, try to narrow them or eliminate them if you can't. So those are some of the things I try to advise executives or employees about again, depending on their negotiating power.

Anita Brick: I love that, Jon, because again, when someone is faced with this kind of obstacle, they sort of forget sometimes. Having it all laid out is wonderful and generous of you and very informative. So thank you so much, Jon. Really, really appreciate it. And thank you all for listening. This is Anita Brick with CareerCast at Chicago Booth. Keep advancing.