Separation and Settlement Agreements; Releases

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					Chapter 17
SEPARATION AND SETTLEMENT
AGREEMENTS; RELEASES
CLAUDIA T. CENTOMINI, ESQ.
Day Pitney LLP, Boston

ROBERT B. FITZPATRICK, ESQ.
Robert B. Fitzpatrick, PLLC, Washington, DC

ELLEN J. MESSING, ESQ.
Messing, Rudavsky & Weliky, PC, Boston

JOY E. TAYLOR, ESQ.
Day Pitney LLP, Boston

JAMES S. WELIKY, ESQ.
Messing, Rudavsky & Weliky, PC, Boston

Chapter 17, Part I
DRAFTING SEVERANCE DOCUMENTS: A
PLAINTIFF’S ATTORNEY’S PERSPECTIVE
ELLEN J. MESSING, ESQ.
JAMES S. WELIKY, ESQ.
Messing, Rudavsky & Weliky, PC, Boston

§ 17.1     INTRODUCTION ........................................................... 17–1

§ 17.2     SEVERANCE PAYMENTS............................................ 17–2
§ 17.2.1   Specificity.......................................................................... 17–2
           (a)     Amount to Be Paid ................................................... 17–2
           (b)     Due Dates for Payment............................................. 17–2


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                                        DRAFTING EMPLOYMENT DOCUMENTS


           (c)     To Whom Payments Should Be Made.......................17–3
           (d)     Where Payments Are Sent.........................................17–3
           (e)     Date of the Agreement ..............................................17–4
           (f)     Preambles ..................................................................17–4
§ 17.2.2   Taxes...................................................................................17–5
           (a)     Payroll Taxes .............................................................17–5
           (b)     Emotional Distress Damages ....................................17–6
           (c)     Attorney Fees ............................................................17–7
           (d)     Medical Expenses......................................................17–8
           (e)     Indemnification .........................................................17–9
§ 17.2.3   Supplementing the Severance Pay Package .......................17–9
§ 17.2.4   Employee Benefits ...........................................................17–10
§ 17.2.5   Cutoff of Severance Pay or Other Benefits ......................17–12

§ 17.3     ASSISTING THE EMPLOYEE’S JOB SEARCH
           AND PROTECTING THE EMPLOYEE’S
           REPUTATION ................................................................17–13
§ 17.3.1   Outplacement ...................................................................17–13
§ 17.3.2   Office Space .....................................................................17–14
§ 17.3.3   Outside Inquiries ..............................................................17–15
§ 17.3.4   Nonretaliation...................................................................17–17
§ 17.3.5   Confidentiality..................................................................17–18
§ 17.3.6   Nondisparagement............................................................17–20

§ 17.4     RELEASES .....................................................................17–21
§ 17.4.1   Mutuality and Indemnification .........................................17–21
§ 17.4.2   Nonwaivable Claims / Savings Clauses ...........................17–22
§ 17.4.3   Unemployment Benefits...................................................17–24
§ 17.4.4   Prospective Releases ........................................................17–25
§ 17.4.5   Who Is Being Released ....................................................17–25
§ 17.4.6   Who Is Obligated and to Whom.......................................17–26


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SETTLEMENT AGREEMENTS; RELEASES


§ 17.5     BREACH/ENFORCEMENT........................................ 17–26
§ 17.5.1   Mutuality ......................................................................... 17–26
§ 17.5.2   Process for Enforcement with Alternative Dispute
           Resolution........................................................................ 17–27
§ 17.5.3   Applicable Law ............................................................... 17–28
§ 17.5.4   Liquidated Damages........................................................ 17–28

§ 17.6     VALIDITY/SEVERABILITY ...................................... 17–29

§ 17.7     COOPERATION ........................................................... 17–30

§ 17.8     NONCOMPETITION AND NONDISCLOSURE
           CLAUSES....................................................................... 17–31
§ 17.8.1   Noncompetition Clauses.................................................. 17–31
§ 17.8.2   Nondisclosure Clauses..................................................... 17–32

§ 17.9     WHEN HAS A “FINAL” AGREEMENT
           BEEN REACHED? ....................................................... 17–33

§ 17.10    INTERNAL REVENUE CODE § 409A ...................... 17–34




2nd Edition, 1st Supplement 2010                                                            17–iii
Chapter 17, Part I
DRAFTING SEVERANCE
DOCUMENTS: A PLAINTIFF’S
ATTORNEY’S PERSPECTIVE
ELLEN J. MESSING, ESQ.
JAMES S. WELIKY, ESQ.
Messing, Rudavsky & Weliky, PC, Boston


                                Scope Note
         This chapter addresses the drafting issues involved in separa-
         tion agreements, settlement agreements, and releases. Part I
         closely analyzes particular provisions of severance agree-
         ments, contrasting language typically proposed by employers
         with approaches better suited to protect the employee’s inter-
         ests. Part II is a highly detailed checklist of issues that may
         arise in the settlement of an employment dispute, identifying
         specific questions that counsel will need to ask in the course of
         resolving the matter. Sample agreements and related docu-
         ments are included as exhibits.



§ 17.1       INTRODUCTION
The following is a brief discussion of some of the many complex issues that face
employment attorneys when drafting severance agreements. This chapter sum-
marizes some ways to use the agreement to add value to the employee’s sever-
ance package and to avoid employer provisions that reduce value. Topics are
broken down into six broad categories of concern, including

     • severance payments,

     • the employee’s job search and protecting the employee’s reputation,

     • mutual releases,

     • breach and enforcement,


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§ 17.1                           DRAFTING EMPLOYMENT DOCUMENTS


       • severability, and

       • cooperation.

For illustrative purposes, redacted excerpts from actual severance agreements
have been included, in many cases, showing modifications from the original
one-sided provisions from the employer.


§ 17.2         SEVERANCE PAYMENTS

§ 17.2.1 Specificity

(a)       Amount to Be Paid
When agreeing to severance payments, the plaintiff’s attorney should take care to
be as specific as possible about the amount of money to be paid. For example, in
the excerpt below, the employee has added a specific rate of pay, modifying the
more general employer’s phrase “_______ agrees to pay _______’s salary for
_____ months.”

          The Company agrees to continue to pay Ms. _______’s salary,
          at her current salary rate of $_____ per year, through
          March 31, 2006 (the “Salary Continuation Period”).

          OR

          The Company agrees to pay Ms. _____ the gross amount of
          $_____, less applicable taxes and withholdings, per pay pe-
          riod, for _____ biweekly pay periods, commencing with the
          pay period ending _____ and terminating with the pay period
          ending _____.

(b)       Due Dates for Payment
The dates when the funds are due should also be included, as they are below.
Provision of a specific due date allows the employee’s attorney to determine
whether the employer is in compliance with the agreement as of that date, and to
ensure that the employer is precluded from claiming that its obligations are ful-
filled if the employer has made only a partial payment.




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SETTLEMENT AGREEMENTS; RELEASES                                            § 17.2


        The Company and Mr. _____ agree that he is entitled to 210 days
        of severance pay ($______) subject to applicable deductions
        pursuant to the Company’s then-current Severance Allowance
        Plan and further agree that the pay Mr. _____receives during
        the period January 2, 2006, through July 15, 2006, does not
        constitute any part of severance pay, and that the 210 days of
        severance pay will be paid out to Mr. _____ on or before
        July 16, 2006. On issuance of the 210 days of severance pay
        on or about July 16, 2006, Mr. _____ agrees that full payment
        of any and all severance benefits for which he is eligible under
        the Severance Allowance Plan will have been made, in consid-
        eration of the agreements set forth herein.

(c)     To Whom Payments Should Be Made
Nonseverance, lump-sum payments made in settlement of claims (which may
include sums for emotional injuries and reputational damages, or may consist of
a total amount both for those injuries and for lost income) should be made to the
employee’s attorney or jointly to the attorney and the employee. This simplifies
collection issues. Note, however, that payroll checks cannot be made payable, or
jointly payable, to the attorney because he or she is not part of the employer’s
payroll system. The following language may be used reflecting a settlement in-
cluding the elements of: (1) a lump-sum, nonwage settlement payment; (2) back
pay; and (3) attorney fees.

        Within ____ days of the Effective Date of this agreement,
        Company agrees to pay (1) by check payable to “__________,
        as attorney for Employee,” the sum of $____ on account of
        Employee’s claims for emotional pain and suffering, reputa-
        tional injury, and mental distress; (2) by payroll check payable
        to Employee, the sum of $____, subject to all applicable taxes
        and withholdings, with federal income tax withheld at a 25%
        rate, on account of Employee’s claims for lost salary; and (3)
        by check payable to “__________,” the sum of $____, on ac-
        count of Employee’s claims for attorney’s fees.

(d)     Where Payments Are Sent
Logistical issues can be avoided by ensuring, as is usually appropriate, that all
checks be mailed to the employee’s counsel:




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§ 17.2                            DRAFTING EMPLOYMENT DOCUMENTS


         All payments due under this Agreement shall be forwarded to
         ________, counsel for Employee, by first class mail, at the fol-
         lowing address: ____________________________________.

(e)      Date of the Agreement
Employers often begin their draft of a severance agreement with a characteriza-
tion of the “date” of the agreement, such as: “this Agreement is dated ____.”
Such characterizations should be avoided. The employer and the employee will
usually sign on different dates, and their respective obligations will normally
begin to run on the date each signs. Instead, the timing of the obligations should
be specified either with reference to execution by one of the parties, or with ref-
erence to a (defined) “effective date.” Examples follow.

         The Employer shall make all payments due under this para-
         graph within ___ days of the Effective Date of this agreement,
         as defined in paragraph ___.

         OR

         The Employer shall make all payments due under this para-
         graph within ___ days of the Employee’s execution of this
         agreement.

In an agreement with a revocation period, such as the seven-day revocation pe-
riod required for waivers of age discrimination claims under the Older Workers
Benefit Protection Act, the following language can be used:

         The Employer shall make all payments due under this para-
         graph within ___ days [at least seven] of the Employee’s exe-
         cution of this agreement, unless the Employee has revoked
         his/her signature pursuant to paragraph ___.

(f)      Preambles
Employers also often include “whereas” or other preamble clauses at the begin-
ning of their drafts. The value of such clauses is unclear. In addition, they are
almost always one sided, and they often mischaracterize the employee’s claims,
sugar-coat the actions about which the employer has been accused, or suggest
that the employee is conceding that his or her claims are invalid. They can often
be perceived as condescending or bullying, and thus serve to add unnecessary
impediments to settlement. If the employee’s attempts to have the clauses
stricken are unsuccessful, the employee should insist on correcting any clauses


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SETTLEMENT AGREEMENTS; RELEASES                                              § 17.2


that inaccurately characterize her or his claims, and can add his or her own lan-
guage to create balance as below (underlined text represents the employee’s ad-
ditions):

         WHEREAS, the Employee understands that the Company de-
         nies each and every allegation of wrongdoing, including, but
         not limited to, all allegations of failure to reasonably accom-
         modate or discrimination and the Company understands that
         the Employee contends that his allegations of wrongdoing, in-
         cluding but not limited to all allegations of failure to reasona-
         bly accommodate and discrimination, are truthful and correct;

         WHEREAS, the Employee and the Company understand and
         agree that neither the making of this Agreement nor anything
         contained herein shall, in any way, be construed or be consid-
         ered to be an admission by the Company, any of its employees,
         or any of its joint ventures or affiliated companies, of noncom-
         pliance with any term of any federal or state law or local stat-
         ute, public policy, or common law, nor an admission by the
         Employee that his allegations that the Company failed to com-
         ply with the law were incorrect or untruthful;


§ 17.2.2 Taxes
If the tax burden for any portion of payments of damages in settlement of claims
can be reduced, the value of the settlement package is higher to both sides. There
are several tax issues to consider in this connection: emotional distress damages;
attorney fees; and medical expenses.

(a)      Payroll Taxes
With regard to payroll checks, note that regulations of the U.S. Department of
the Treasury allow employers to use a flat-rate percentage in calculating the
amount of withholding for “supplemental wages,” including bonuses, commis-
sions, and overtime pay, as long as

      • the employer has withheld income tax from regular wages, and

      • the supplemental wages are either not paid concurrently with
        regular wages or separately stated on the payroll records of the
        employer.




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§ 17.2                             DRAFTING EMPLOYMENT DOCUMENTS


Treas. Reg. § 31.3402(g)-1. This is a very useful tool for insuring that a client is
not hit with a disproportionate tax on the settlement check.

In the absence of a supplemental wage treatment, taxes would be withheld at
much higher rates. Pursuant to Section 904(a) of the American Jobs Creation Act
of 2004, 118 Stat. 1448, the flat rate for withholding on supplemental wages
“shall not be less than 28 percent (or the corresponding rate in effect under sec-
tion 1(i)(2) of the Internal Revenue Code of 1986 for taxable years beginning in
the calendar year in which the payment is made).” Section 1(i)(2) of the Internal
Revenue Code states that the applicable rate (replacing 28 percent) for 2003 and
thereafter is 25 percent. I.R.C. § 1(i)(2).

(b)      Emotional Distress Damages
Prior to 1996, emotional distress was considered to be a type of physical injury,
and damages for it were usually not taxable. The Small Business Protection Act
of 1996, 110 Stat. 1755 (hereinafter 1996 Act) changed this, explicitly making
emotional distress damages taxable. I.R.C. § 104(a). However, unlike lost wages,
emotional distress damages are not subject to such payroll taxes as Social Secu-
rity, Medicare, or unemployment taxes. Consequently, there is still an advantage
in allocating a settlement payment between emotional distress and wages. This
allocation must be legitimately based on the underlying claims or other reasona-
bly objective factors, and the agreement should reflect that allocation. One de-
fensible strategy is to make the allocation parallel the ratio of emotional distress
to back-pay damages that was articulated during settlement discussions. The
nonwage-related payments in the referenced agreement are handled as follows.

         Consistent with the parties’ mutual understanding that the
         payment to the Employee described in paragraph 1 of this
         Agreement (the “Payment”) is being paid in settlement for al-
         leged personal injuries, including physical injury and emo-
         tional distress, and not for back pay, wages or nonemployee
         compensation, the Company agrees not to voluntarily prepare
         or file a Form W-2, or any other form, statement, or other
         document with any taxing authority that states or implies that
         the Payment constitutes income taxable as wages. Instead, the
         Company agrees to prepare and file a Form 1099, identifying
         the Payment as nonwage income. The Company agrees to as-
         sert to any taxing authority, should the issue arise, that the
         Payment is being paid pursuant to an agreement to settle
         claims for alleged personal injuries, including physical injury
         and emotional distress, and not for back pay, wages, or non-
         employee compensation, and accordingly in the Company’s

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SETTLEMENT AGREEMENTS; RELEASES                                              § 17.2


         view the Payment does not constitute wages or any form of
         compensation.

Note that the agreement should have a separate provision making clear that a
separate amount is being paid as taxable wages in settlement of the employee’s
back-pay claim.

(c)      Attorney Fees
Settlement agreement provisions relating to attorney fees and costs also have
important tax ramifications. Prior to 2004, a split of opinion existed among the
circuits as to whether an employee realized taxable income from settlement
proceeds paid on account of attorney fees. Some courts had ruled that such
attorney fee payments represent taxable income to the employee, even though
the employee never actually receives any of those payments; other courts found
otherwise. In some jurisdictions, the text and structure of state laws on attorneys’
liens prompted claims, which were affirmed by some courts, that the attorney
fees never become property of the employee, and thus are taxable only to the
attorney. Consequently, some agreements were structured to ensure that the
employer issued two IRS 1099 forms, one to the employee’s attorney for fees,
the other to the employee for the remaining payments. However, in
Commissioner v. Banks, 546 U.S. 426 (2005), the U.S. Supreme Court
foreclosed any tax benefit from such provisions, ruling that all payments for
attorney fees and costs made as part of settlements are attributable to an
employee as taxable income.

Fortunately for both employees and employers, the Banks doctrine has limited
significance in light of corrective legislation. On October 22, 2004, Congress
passed the American Jobs Creation Act of 2004, 118 Stat. 1448 (hereinafter
2004 Act). Section 703 of the 2004 Act allows employees to deduct the portion
of an employer’s severance or settlement payment representing payment for all
or part of the employee’s attorney fees and costs when the payment is made in
connection with virtually any employment-based lawsuit. I.R.C. § 62(a)(19), (e).
The 2004 Act clarified that attorney fees included in settlement payments are not
taxable to the employee. For payments made on or after October 23, 2004 (the
effective date of the 2004 Act), attorney fees are considered income to the em-
ployee, but they may be deducted “above the line” when computing the em-
ployee’s adjusted gross income.

The practical effect of the 2004 Act is enormous. If employees are no longer
taxed on monies received by their attorneys, then the portion of any settlement
that represents attorney fees is worth more to the employee than it used to be.



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§ 17.2                            DRAFTING EMPLOYMENT DOCUMENTS


Accordingly, the same number of employer settlement dollars is now worth
more to the employee—an obvious benefit in facilitating settlement.

Various bar associations and civil rights groups across the country are seeking
further legislative modification of the 1996 Act to alleviate the taxation of set-
tlement proceeds in civil rights cases. There are continuing efforts to lobby Con-
gress to pass proposed legislation that would provide that emotional distress
awards are not taxable, restoring the status existing prior to passage of the 1996
Act.

(d)      Medical Expenses
Special consideration should also be given to proceeds directed at compensating
employees for medical expenses. As discussed above, I.R.C. § 104(a) explicitly
includes emotional distress damages as taxable income. However, Section
104(a) further clarifies that damages ascribable to amounts paid for medical ex-
penses generated as a result of emotional distress are not taxable. Specifically,
the provision states that the portion of Section 104(a) excluding emotional dis-
tress from the definition of physical injury (and thus explicitly including it in
taxable income) “shall not apply to an amount of damages not in excess of the
amount paid for medical care (described in subparagraph (A) or (B) of section
213(d)(1)) attributable to emotional distress.” I.R.C. § 104(a).

Therefore, plaintiffs’ attorneys preparing settlement agreements must determine
whether the employee has incurred any medical expenses and, if so, draft a sepa-
rate provision regarding medical expenses. Payments made to compensate for
the employee’s medical expenses should be paid by separate check, so as to fa-
cilitate proper tax treatment.

         Within ____ days of the date of execution of this agreement,
         the Company agrees to pay by check payable to Employee, the
         sum of $ ____ as compensation to Employee for medical ex-
         penses incurred for medical care on account of physical inju-
         ries and mental distress. The Company further agrees not to
         voluntarily prepare or file any form, statement or other docu-
         ment with any taxing authority that states or implies that this
         compensation constitutes income taxable to Employee. The
         Company agrees to assert to any taxing authority, should the
         issue arise, that the compensation is reimbursement for medical
         expenses incurred by Employee.




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SETTLEMENT AGREEMENTS; RELEASES                                             § 17.2


(e)      Indemnification
Despite the fact that allocation of settlement proceeds for tax purposes is clearly
permitted under the tax statutes, employers often resist such allocations and/or
insist on indemnification clauses that hold the employer harmless should a tax-
ing authority question the allocation. Such clauses are unnecessary and usually
overbroad. For example, employers often ask that the employee indemnify the
employer from paying the employer’s portion of any FICA or Medicare with-
holding owing should a taxing authority determine that a certain aspect of dam-
ages is more properly characterized as wages. However, the employee would not
have been required to pay such withholding even if the payment had been char-
acterized as wages originally, and thus there is no justification for requiring the
employee to cover any such payment at a later time. In effect, such provisions
serve as a penalty on the employee over and above any penalties the taxing au-
thority may impose, and as such they should be rejected.

Moreover, indemnification clauses appear to be based on the assumption that
allocation of any portion of the settlement proceeds to attorney fees or emotional
distress somehow represents a voluntary choice by the employee for which the
employee should consequently bear all risks and burdens. But this is not the
case. By allocating settlement proceeds among the categories for which the law
permits recovery, the employee is simply providing an accurate picture of the
categories of compensable losses on which the actual settlement was based. To
allocate the entire payment to wages might incur no tax risk for the employer,
but it would not accurately reflect the nature of the settlement. The employer is
not authorized to “choose” to so mischaracterize the settlement. Thus there is no
legitimate basis for shifting to the employee all risks and burdens of an accurate
allocation of the settlement proceeds.


§ 17.2.3 Supplementing the Severance Pay Package
Some employers have strict guidelines limiting the number of months of sever-
ance pay a departing employee can receive. If such is the case, in order to allow
the employer to save face when paying the employee more than what is set forth
in the guidelines, additional payments can be allocated to attorney fees, job-
hunting expenses, medical coverage, prorated bonuses, supplemental 401(k) or
pension contributions, and the like.

In addition, or as an alternative, the employee can seek nonmonetary forms of
consideration that can enhance the value of a severance agreement. These can
include permission to keep a company-provided computer; permission to keep a
company cell phone and/or data phone; and the company’s agreement to cover
the remaining lease payments on a company car or (at a minimum) to allow the

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§ 17.2                              DRAFTING EMPLOYMENT DOCUMENTS


employee to take over the car lease. Also, outplacement or other services can be
provided, as in the sample text below.

           Outplacement Assistance and Attorney Fees. The Company
           shall pay up to $______ on behalf of Mr. _______ to Mr.
           _______’s attorney, _______, as attorney fees. The specific
           amount of attorney fees (up to ______ Thousand Dollars
           ($______)) to be paid to Mr. ______ shall be designated by
           Mr. ______ in a writing directed to the Company attorney,
           _______. Said payment shall be made within seven (7) days of
           the Effective Date of this agreement. The Company shall pay
           an amount up to the difference (if any) between the attorney
           fee payment and ______ Thousand Dollars ($______) directly
           to a legitimate outplacement consulting firm selected by Mr.
           ______ for the purpose of providing executive level outplace-
           ment services to Mr. ______.

         Practice Note
         Be aware that there may be tax implications (that is, the cost of the
         outplacement may be taxable to the employee as wages) where out-
         placement services are provided in lieu of a higher severance pay
         amount.


§ 17.2.4 Employee Benefits
Traditional employee benefits to be covered by the employer posttermination
also should be specified as precisely as possible, with dates and types of benefits
outlined, as below.

           Benefits: For the first three (3) months of the Salary Continua-
           tion Period, the Company will continue to provide to Ms.
           _______ all medical and dental benefits in effect as of the ef-
           fective date hereof, at no charge to Ms. _______. During the
           Salary Continuation Period, the Company will continue to
           make contributions to Ms. _______’s 401(k) plan account, and
           to deduct contributions from Ms. _______’s salary payments,
           at the same rate as presently. After the expiration of said three-
           month period, Ms. _______ shall be entitled to, and shall be
           given timely notice of her right to continued medical and den-
           tal coverage under the Consolidated Omnibus Budget Recon-
           ciliation Act of 1986 (COBRA). Immediately upon the expira-
           tion of the entirety of the Salary Continuation Period, the
           Company will pay Ms. _______ for all vacation time accrued

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SETTLEMENT AGREEMENTS; RELEASES                                                § 17.2


         up to that date. During the Salary Continuation Period, Ms.
         _______ may advise third parties that her status is presently
         that of a Company employee on a leave of absence.

Of particular concern are health insurance and COBRA rights, including when
notification of continuing coverage occurs, who pays the premiums, and for how
long premiums are to be paid. Under the American Recovery and Reinvestment
Act of 2009 (ARRA), COBRA was amended to provide for a temporary reduc-
tion in premiums and additional opportunities to elect continued group health
coverage for employees who become eligible for coverage as a result of an in-
voluntary termination between September 1, 2008 and December 31, 2009.
ARRA provides that eligible employees are required to pay 35 percent of the
applicable COBRA premium while the employer pays the rest, for which it can
seek reimbursement from the federal government. Generally, the subsidized rate
is available for up to nine months of continuation coverage. On July 2, 2009, the
Massachusetts legislature incorporated the foregoing changes into the state’s
“mini-COBRA” law, affecting Massachusetts employers with two to nineteen
employees. On December 21, 2009, President Obama signed into law an exten-
sion of the COBRA subsidy for employees who are involuntarily terminated
between January 1, 2010 and February 28, 2010. The new legislation also ex-
tends the allowable time for receipt of the subsidy from nine months to fifteen
months.

Other benefits might include life insurance, 401(k) matching contributions,
short-term or long-term disability, and compensation for the loss of pension
benefits due to early departure.

      Practice Note
      Note that most employer disability and health insurance plans termi-
      nate, by their terms, at or shortly after the end of an employee’s ac-
      tive employment.

In addition to traditional employee benefits, employee stock options might be
worth a considerable amount to an employee. In most cases, options that have al-
ready been vested can be exercised only within a limited time period (usually be-
tween ten and ninety days) after the employee is separated from employment.
Thus, it may be important for the agreement to set the date of separation as late as
possible so as to allow maximum vesting and a longer exercise period.

Where an employee has received stock options during his or her employment, and
the company’s market price is higher than the option price, the agreement should
spell out the vested and yet-to-be-vested options held by the employee; when the
yet-to-be-vested options will be vested; the specific plan (or plans) that govern the
vesting; and a time period in which the employee can exercise these options.

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§ 17.2                              DRAFTING EMPLOYMENT DOCUMENTS


           Employee was granted [NUMBER] stock options on [DATE], to
           have vested as of [DATE] pursuant to the terms, conditions, and
           provisions of the Company’s Stock Option Plan; and
           [NUMBER] stock options on [DATE], to have vested as of
           [DATE], pursuant to the terms, conditions, and provisions of the
           Company’s Stock Option Plan (“CSOP”). Stock options vested
           as of the date of this Agreement may be exercised by Employee
           within [TIME] of this Agreement, in accordance with and sub-
           ject to the terms, conditions, and provisions of the CSOP.

         Practice Note
         Employees’ counsel should try to obtain payment from the employer
         to compensate the employee for the value of any stock options that
         the employee could have exercised within a reasonably short period
         after termination, or stock options that were close to vesting, but
         were forfeited due to termination.


§ 17.2.5 Cutoff of Severance Pay or Other Benefits
Often, an employer proposes that the term during which salary continuation or
outplacement services is to be provided ends when the employee obtains another
position. The plaintiff’s attorney should try to insure that payment or services
will continue until the employee obtains employment “comparable” to his or her
old job, and the attorney should try to obtain a definition of this phrase to ensure
that a lower-paying, temporary, part-time, or less responsible position cannot be
considered “comparable.” For example, the following language defines “compa-
rable employment” as similar in status and earnings. The attorney may also want
to add (or protect against adding) self-employment to the definition of compara-
bility. The language below excludes self-employment as a factor that would end
salary continuation.

The employee’s attorney should also seek to avoid an ending of severance pay
upon commencement of new employment, on the ground that this would operate
as a disincentive to the employee to find a new job. At least, the new job “pen-
alty” should not be 100 percent:

           In the event Ms. _______ shall accept comparable employ-
           ment which she begins prior to the expiration of the Salary
           Continuation Period, her salary continuation shall cease and,
           within five (5) business days of the cessation of her salary con-
           tinuation, the Company shall pay to Ms. _______, in one lump
           sum, an amount equal to the remaining balance [or, alterna-
           tively, at least “half the remaining balance”] that would have

17–12                                             2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                                § 17.2


         been paid had Ms. _______ not accepted such comparable
         employment. For purposes of this paragraph, “comparable
         employment” means a full-time, non-temporary position rea-
         sonably comparable in status and earnings to the position Ms.
         _______ held at the Company as of March 31, 2006, and does
         not mean or include self employment.


§ 17.3       ASSISTING THE EMPLOYEE’S JOB
             SEARCH AND PROTECTING THE
             EMPLOYEE’S REPUTATION

§ 17.3.1 Outplacement
Outplacement services can be valuable in helping a discharged employee resume
his or her career. Outplacement agencies typically classify their programs either
by terms descriptive of different levels of service (e.g., “standard,” “executive,”
or “senior executive”) or by proprietary names.

      Practice Note
      Before your client signs the severance agreement, encourage the
      client to explore the proposed outplacement agency’s Web site and
      talk with an agency representative about the agency’s offerings, phi-
      losophy, and approach. Clients should ask the representative to out-
      line the steps the agency would take to assist someone in the cli-
      ent’s shoes. If the agency is not a good fit, your client can investi-
      gate others with your guidance. The employer may be willing to sub-
      stitute your client’s suggested alternative provider if its prices are
      comparable (or even to cash-out the cost of the out-placement bene-
      fit). However, if the employer has bargained for a group discount from
      a particular provider, substitutes may not be available.

The level, quality, and monetary value of outplacement services tend to vary
depending on the employee’s level within the organization and his or her bar-
gaining power with the employer. Employees should bargain to enhance this
level of services if possible, by specifying either a monetary amount to be spent
on the services or the level of services to be afforded. Obviously, an employee’s
attorney will always try to obtain the highest level of outplacement for the em-
ployee. The language in the excerpt below specifies both the level of outplace-
ment services and their value.




2nd Edition, 1st Supplement 2010                                            17–13
§ 17.3                             DRAFTING EMPLOYMENT DOCUMENTS


         ________ agrees to provide senior executive-level outplace-
         ment assistance to Mr. _______ in an amount not to exceed
         $______ or _____% of Mr. _______’s current salary. It is un-
         derstood that this assistance will be provided beginning as
         soon as an outplacement service can be identified and mutu-
         ally agreed upon, and will continue for ____ months, or until
         the employee obtains comparable employment as defined in
         paragraph _____. This sum will be billed directly by the out-
         placement or career assistance firm as incurred and will not
         be paid to Mr. _______ if unused.

See § 17.2.5, above, for a discussion of “comparable employment.”


§ 17.3.2 Office Space
In addition to outplacement services, the plaintiff’s attorney can try to negotiate
for provision of office space and services for a period of time at the employer’s
facilities. Such a benefit is relatively inexpensive for the employer and gives the
impression to potential new employers, search firms, and employment agencies
that separation was amicable. In the next example, the employer agreed to pro-
vide a telephone extension, voice mail, and secretarial services to take and forward
the employee’s messages.

         During the reinstatement period:

         (a) _______ will not come into work and no work will be ex-
         pected from her;

         (b) _______’s name will be put on _______’s seniority list,
         and she shall be treated as an employee for payroll and per-
         sonnel, and vacation accrual purposes;

         (c) if requested, _______ will verify that _______ is currently
         employed by _______ as a consultant, earning $______ per
         year plus bonus and benefits; that _______ began employment
         at _______ in _______; and that she held the title of _______
         from _______ through _______;

         (d) _______ will assign a telephone extension number to
         _______ and calls to her will be put through to that extension;

         (e) That extension will be answered by _______’s former sec-
         retary, “A.” Callers will be advised that _______ is unavail-
         able, and will be asked to leave a message. “A” will forward

17–14                                           2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                                § 17.3


         messages to _______ on at least a daily basis. _______ may
         also call in for messages. The Company will also assign
         _______ a voice mailbox number for _______ use, and “A”
         or her replacement may leave messages for _______ there;

         (f) _____’s company email account will be re-activated and
         will remain active. _____ will abide by the Company’s email
         policy [identify policy] throughout the reinstatement period.


§ 17.3.3 Outside Inquiries
During the job search, it is essential for the employee to eliminate or at least
minimize the release of negative information and, if possible, to elicit a helpful,
positive reference for use in the job search. That means that a key function of the
severance agreement from the employee’s perspective is the control of the
sources and the content of the information released by the employer. The parties
can accomplish this by specifying in the agreement which corporate employees
may give references and by preparing the contents of responses to third-party
inquiries. The parties should also draft the employment reference that is to be
distributed by the company and attach the reference as part of the severance
agreement itself. This ensures that the reference will be finalized promptly; if
left to be written later, often the letter never materializes or is unsatisfactory. In
the next excerpt, the employer’s language should be deleted because it is too
vague. The employee had no access to, or control over, the manner in which
information was to be provided by the employer. The alternate language ensures
that there will be only one information source. It also ensures that the only sub-
stantive reference will be provided by a given individual whom the employee
knows and trusts to give a favorable reference.

The employer’s language:

         References: In further consideration of this Agreement, the
         Company shall respond to employment inquiries regarding
         Ms. _____’s employment with only the dates of employment
         and position held and with additional information mutually
         agreed to by the parties hereto.

The employee’s language:

         Outside Inquiries: The Company agrees that any inquiry
         (other than inquiries seeking a job reference) from any person
         as to Ms. _______’s status, position and/or employment rela-
         tionship or employment history with the Company (other than


2nd Edition, 1st Supplement 2010                                               17–15
§ 17.3                            DRAFTING EMPLOYMENT DOCUMENTS


         inquiries seeking a job reference) shall be referred to the
         Company’s Director of Human Resources (“Director”) or to
         another Human Resources Department manager whom said
         Director may designate (“Designee”), except that the Director
         shall not designate more than one Designee for this purpose.
         The Director or Designee shall respond to each such inquiry
         by informing the inquirer of Ms. ______’s dates of employ-
         ment and job titles held, and that Company policy precludes
         the provision of any further information to the inquirer. If any
         such inquiry is received during the Salary Continuation Pe-
         riod, the Director or Designee shall advise the inquirer that
         Ms. _______ is employed by the Company but is presently on
         a leave of absence.

         The Company further agrees that any inquiry from any person
         seeking an oral or written job reference for Employee shall be
         referred initially to _______ so long as he is employed by the
         Company. At any time after Mr. _______ is no longer em-
         ployed by the Company, any person inquiring for an oral or
         written job reference for Ms. _______ shall be referred to the
         Director or Designee, who shall respond that Mr. _______ is
         the only individual affiliated with the Company with sufficient
         familiarity with Ms. _______’s work to provide a reference;
         that Mr. _______ is no longer employed by the Company; and
         that (if Mr. _______ consents) he can be reached at a new ad-
         dress and/or number which shall be provided. The Director or
         Designee shall make no other comments and shall provide no
         other documents.

In the following provision, the parties agreed that a specified reference would be
given for the employee and that oral references would track the written one.

         Within _____ days of the effective date of this agreement, the
         Company agrees to provide an original of the reference letter
         attached hereto as Attachment D, executed by Mr. _____,
         which Employee may use freely in her job search. In the event
         that Mr. _______ is asked by a prospective employer or re-
         cruiter to respond to an oral or written request for information
         about Ms. _____’s employment history with Company, he will
         respond in a positive manner that is consistent with Attach-
         ment D and will, if asked, confirm Ms. _____’s compensation
         level (including salary, bonuses, and stock options).



17–16                                          2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                              § 17.3


Further protection from the release of negative information would require that all
derogatory information about the employee be removed from personnel files.

         Within ten (10) working days of the effective date of this Set-
         tlement Agreement, the Company shall remove or cause to be
         removed from every personnel or confidential employee file it
         maintains on Employee, any and all information identified as
         derogatory by Employee. Nothing in this paragraph shall pre-
         clude the Company’s attorneys from maintaining a separate
         file regarding the matters referred to herein.

Note that an employee may have a claim for retaliation if he or she is leaving
after making a claim of discrimination, and the employer has provided favorable
references to others in the past and refuses to do so for him or her.


§ 17.3.4 Nonretaliation
As illustrated by the following language, the employee should protect himself or
herself, and any others involved (such as family members who are also employed
by the same company), from retaliation by the employer.

         ________ acknowledges its obligation and that of its man-
         agement employees under applicable law and regulations to
         refrain from discrimination and retaliation in future on ac-
         count of _______’s participation in this litigation or on ac-
         count of this settlement and the undertakings herein.

Note that employers will occasionally require a provision that the employee will
never seek employment from that employer in the future. However, such a provi-
sion in a discrimination case could well be considered retaliatory (in that it ar-
guably sanctions an employee for having previously pursued a discrimination
claim) and hence might be unenforceable. Employers usually argue that they do
not want to be held liable for retaliation if they fail to rehire the employee. Such
nonrehire provisions should be drafted as narrowly as possible; employees’ law-
yers should try to limit their applicability and to negotiate an expiration date. In
the sample below, the employer provided the first sentence, and the subsequent
modifying language was provided by the employee.

         Employee agrees not to knowingly [Note: The word “know-
         ingly” was added by the Employee] apply for re-employment
         at the Company or any parent, subsidiary, or affiliate of the
         Company. The Company acknowledges that the foregoing sen-
         tence does not preclude Employee from applying for or obtain-


2nd Edition, 1st Supplement 2010                                             17–17
§ 17.3                             DRAFTING EMPLOYMENT DOCUMENTS


         ing employment at, and does not authorize Employee’s dis-
         charge from, any entity (1) that is not a parent, subsidiary, or
         affiliate of the Company as of the date of her execution of this
         Agreement, but becomes one subsequently or subsequently be-
         comes acquired by or merged into the Company; (2) that is a
         parent, subsidiary, or affiliate of the Company as of the date of
         her execution of this Agreement, but which does not hold that
         relationship with the Company as of the date that Employee
         commences employment with such entity; or (3) to which Em-
         ployee applies on or after _____ years from the date of execu-
         tion of this Agreement.


§ 17.3.5 Confidentiality
As important as controlling external access to negative information is controlling
internal access to information about the settlement agreement or the fact that the
employee has brought claims against the company. Indeed, control of outside ac-
cess to negative information is not realistic without internal controls. Accordingly,
the employee must ensure that a guarantee of confidentiality is not one-sided.
Language to the effect that “the parties” must maintain confidentiality is insuffi-
cient. In effect, such language establishes that an employer may communicate
details of the settlement to any of its personnel, but an employee cannot discuss
the settlement with anyone, including family members. In the provision below, the
employer’s language should be deleted because it is too vague as to who, among
the employer’s personnel, would be included in the ban on disclosure and because
the language excludes disclosure to the employee’s family members.

Exclusions to information access should be as specific as possible, as should con-
ditions for access within the company. The employee, at least, should be specifi-
cally permitted to communicate with family members, attorneys, outplacement
staff, headhunters, and financial and tax counselors. The employee’s language in
the following excerpt provides security for the settlement agreement; specifically
lists nonemployer individuals to whom the agreement can be disclosed; and iden-
tifies who, among the employer’s personnel, may have access and under what
conditions. This provision also names a particular corporate officer who will have
control over information access. Finally, it provides that individuals likely to dis-
parage the employee will be instructed not to do so. In general, such top-down
instructions are quite effective if restricted to a small group.

The employer’s language:

         Confidentiality: This Agreement is confidential. The parties
         agree not to disclose, or cause their attorneys or agents to dis-

17–18                                            2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                             § 17.3


        close, the terms hereof, except as may be specifically permitted
        by the other party or as either may be compelled to do so as re-
        quired by state or federal law. Nothing contained herein shall
        prevent or restrict either party from disclosing such information
        to accountants or other professionals who advise the parties
        with respect to financial matters and who are bound to respect
        this confidentiality provision.

The employee’s language:

        Confidentiality: Both parties hereto agree that the provisions,
        terms, and conditions of this Settlement Agreement are to be
        held in strict confidence. The Company further agrees that the
        original and any copies of this Settlement Agreement shall be
        maintained in a separate file in a secure place in the offices of
        [Specify someone, such as HR director or company attorneys
        or both] and that no original or copy thereof shall be main-
        tained in any other place. Ms. _______ further agrees not to
        disclose, unless compelled by legal process, the provisions,
        terms, or conditions of this Agreement to any person, except
        her attorney(s), tax and financial adviser(s), outplacement
        agency personnel, employment agency staff, and members of
        her family. The Company further agrees not to disclose, unless
        compelled by legal process, the existence, provisions, terms, or
        conditions of this Settlement Agreement to any person, includ-
        ing, without limitation, any Company agent or employee, ex-
        cept that such disclosure may be made on a strict need-to-
        know basis, only to the extent necessary to further a specific
        and legitimate business interest of the Company. The Company
        further agrees to direct [those of its management employees
        who have had any role in or have any familiarity with the
        circumstances of Ms. _______’s work; her termination; or
        the existence, terms or conditions of this agreement] [alter-
        native: list specific individuals] to make no comment to any
        person, including, but not limited to, any Company agent or
        employee (other than those persons identified by the Com-
        pany’s counsel as having a need to know, and then only to the
        extent necessary to further a specific and legitimate business
        interest of the Company) concerning Ms. _______’s job per-
        formance, skills, abilities or termination from employment, or
        concerning the existence, terms or conditions of this agree-
        ment, and to direct all inquiries concerning such matters to
        Mr. _______ or, should Mr. ______ leave the Company’s em-


2nd Edition, 1st Supplement 2010                                            17–19
§ 17.3                            DRAFTING EMPLOYMENT DOCUMENTS


         ploy, to the Company’s Director of Human Resources or Des-
         ignee described in paragraph ____.


§ 17.3.6 Nondisparagement
An employer will often insist on some sort of nondisparagement clause. How-
ever, the quid pro quo for such a clause (i.e., obtaining a parallel provision gov-
erning the Company’s nondisparagement of the employee) may also afford addi-
tional protection to the employee with regard to future employment opportuni-
ties. Often, the form proposed by the employer will be exceedingly open-ended,
as in the following.

         You agree that you will not say anything to any third parties
         that is detrimental to the Company, its officers and direc-
         tors . . . .

Such a clause could effectively encompass almost anything said by the employee
concerning the company. The following provision, in addition to being mutual,
attempts to define the concept of disparagement in a much more limited manner.

         Neither of the parties will knowingly make any statement, take
         any action, or conduct himself, herself or itself in any way that
         such party has reason to believe may adversely affect the repu-
         tation of, or goodwill towards, the other. Nothing in this para-
         graph shall affect the right of either party to engage in normal
         business competition.

Finally, all clauses in settlement agreements pertaining to nondisparagement or
waivers of claims (see below) should include language reflecting the holding of
EEOC v. Astra USA, Inc., 94 F.3d 738 (1st Cir. 1996), regarding the employee’s
ability to cooperate with fair employment investigations, such as the following:

         Nothing in this paragraph shall preclude the employee from
         communicating with, or cooperating with any investigation of
         unfair or illegal employment practices by, the United States
         Equal Employment Opportunity Commission or the Massa-
         chusetts Commission Against Discrimination or any other
         government agency charged with enforcement of laws pertain-
         ing to the regulation of the workplace.

Plaintiffs’ attorneys should attempt to broaden the latter language even further
by adding to the above the following language:



17–20                                           2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                              § 17.3


         Further, nothing in this paragraph shall restrict the em-
         ployee’s right to initiate any complaint before the United
         States Equal Employment Opportunity Commission or the
         Massachusetts Commission Against Discrimination or any
         other government agency charged with enforcement of laws
         pertaining to the regulation of the workplace [or, where appli-
         cable: “or regulation of the securities/banking/etc. industry”]
         for the purpose of providing that agency with notice of allegedly
         unfair or illegal practices.


§ 17.4       RELEASES

§ 17.4.1 Mutuality and Indemnification
The terms of releases should be mutual and carefully crafted. In the following,
the employee added a release to the agreement, which included language prohib-
iting the employer (equally with the employee) from bringing claims that may
have arisen during the employment term.

         General Release by the Company: Except with respect to any
         rights, obligations or duties arising out of this Agreement,
         which are expressly excluded from this General Release, the
         Company hereby fully, forever, irrevocably and uncondition-
         ally releases, remises and discharges Ms. _______ from any
         and all manner of claims, charges, complaints, demands, ac-
         tions, causes of action, suits, rights, debts, dues, sums of
         money, costs, losses, accounts, reckonings, covenants, con-
         tracts, controversies, agreements, promises, leases, doings,
         omissions, damages, executions, obligations, liabilities, and
         expenses (including attorney fees and costs) of every kind and
         nature whatsoever, whether known or unknown, either at law,
         in equity, or mixed, that it ever had, now has, or can, shall, or
         may have, by reason of, on account of, or arising out of any
         matter or things that have happened, developed, or occurred
         before the signing of this Agreement, including, but not in limi-
         tation of, the foregoing general terms, any and all suits in tort
         or contract and any and all claims, asserted or unasserted,
         arising from Ms. _______’s employment with or separation
         from the Company. It is expressly agreed and understood that
         this release is a General Release. The Company agrees not to
         institute any charge, complaint or lawsuit to challenge the va-


2nd Edition, 1st Supplement 2010                                             17–21
§ 17.4                            DRAFTING EMPLOYMENT DOCUMENTS


         lidity of this General Release or the circumstances surrounding
         its execution.

In the event that an employer is unwilling to agree to a general release of the
employee, it may still be persuaded to agree to a release of claims about which it
knew or should have known at the time the agreement was executed. At a mini-
mum, the employer should be willing to state in the agreement that it is not pres-
ently aware of any claims against the employee. The employee should also nego-
tiate a clause that his or her release does not include counterclaims or claims for
set-off against any company employees who may individually sue your client,
and should seek indemnification from the employer (often the company’s insur-
ance covers this) for any third-party claims brought against the employee for the
client’s acts or omissions while employed.

Following is an example of an indemnification clause for third-party claims:

         The Company agrees that to the fullest extent permitted by
         law, it will indemnify the Employee against any claims made
         against the Employee by any third party as a result of any acts
         or omissions by the Employee in the course and within the
         scope of his employment at the Company, except as to acts or
         omissions not in good faith or which involve intentional mis-
         conduct or a knowing violation of law. The Company also
         agrees that it will advance its own funds to pay for the Em-
         ployee’s defense against any such claims to the fullest extent
         permitted by law, subject to any conditions required by law.
         Both parties acknowledge and agree that the Company’s pre-
         sent counsel is currently authorized by the Employee and the
         Company to represent the Employee’s interests in any such de-
         fense concurrently with representing the Company’s interests,
         but that if such concurrent representation subsequently be-
         comes impossible, the Company will provide the Employee
         separate counsel at that time at its sole expense.


§ 17.4.2 Nonwaivable Claims / Savings Clauses
Under Massachusetts law, workers’ compensation claims cannot be waived via
private agreement. G.L. c. 152, § 75B(3). The plaintiff’s attorney should be
aware of other claims not waivable without government involvement, such as
those under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq., and the Mas-
sachusetts unemployment benefits statute, G.L. c. 151A, § 35.




17–22                                           2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                              § 17.4


Both federal and state age discrimination claims can be waived only if the lan-
guage of the waiver follows the specific technical requirements of the Older
Workers Benefit Protection Act (OWBPA), 29 U.S.C. § 626(f). Oubre v. Entergy
Operations, Inc., 522 U.S. 422 (1998); McCabe v. Tetley, Inc., No. 94-BEM-
2014, 2000 WL 33665341, at *6 (MCAD Mar. 31, 2000) (G.L. c. 151B claims).
The OWBPA requires (inter alia) that the waiver must be written in plain lan-
guage; that the employee must be afforded twenty-one days (or forty-five days if
part of a mass layoff) to consider the waiver and a seven-day revocation period;
that the employee must be advised in writing to consult an attorney prior to sign-
ing the agreement; and that the waiver must specifically refer to the discrimination
statutes being waived. See sample provision, below.

         With respect to any rights _______ may have under the Age
         Discrimination in Employment Act of 1967 or Massachusetts
         discrimination statutes, which rights are being released under
         this Agreement, _______ understands that she has been af-
         forded 21 days to consider this Release; that she has been ad-
         vised in writing to consult an attorney prior to executing the
         agreement; that for a period of seven (7) days following the
         execution of this Agreement by her she may revoke the Releases
         as to such rights; that the Release shall not become effective
         or enforceable as to the release of such rights until this seven-
         day revocation period has expired; and that __________ has
         no obligation to pay any sums referred to in this Agreement
         before the Release becomes effective and enforceable.

It is also important to preserve claims protected by ERISA, including any re-
tirement benefits or disability benefits to which the employee may later become
entitled. Thus, the following exception should be appended to the end of any
release signed by an employee:

         Except with respect to any rights, obligations, or duties arising
         out of this Agreement; any rights, obligations, or duties arising
         out of any workers’ compensation statute; any rights, obliga-
         tions, or duties arising out of any pension, retirement or other
         benefit plan protected by the Employee Retirement Income Se-
         curity Act (ERISA) of the Company; any rights to continued
         health insurance benefits under COBRA; and any rights to re-
         ceive unemployment compensation benefits, all of which are ex-
         pressly excluded from this General Release, Ms. _______
         hereby fully, forever, irrevocably, and unconditionally releases,
         remises, and discharges the Company from any and all manner
         of claims, charges, complaints, demands . . . [etc.].


2nd Edition, 1st Supplement 2010                                             17–23
§ 17.4                           DRAFTING EMPLOYMENT DOCUMENTS


The right to bring an action for enforcement of the settlement agreement itself
should not be waived.

         Nothing in this paragraph shall preclude Ms. _______ from
         pursuing (a) any claims to enforce this agreement . . . .


§ 17.4.3 Unemployment Benefits
The plaintiff’s attorney should secure a pledge from the employer not to contest
unemployment claims with language such as the following.

         The Company agrees that in response to any request for in-
         formation about Employee from unemployment authorities, the
         Company will state that separation was requested by the em-
         ployer, there was no misconduct on the part of the employee,
         and eligibility is not contested for unemployment benefits to
         begin on or after [date of separation].

Note that this language prevents the employer from advancing reasons for depar-
ture that would disqualify the employee from benefits under G.L. c. 151A,
§ 25(e)(1) (voluntary quit) or § 25(e)(2) (discharge for deliberate misconduct).

Note that the receipt of severance benefits or a settlement payment does not af-
fect unemployment eligibility if the employee has been required to sign a release
to receive the severance or settlement payment. See DiCerbo v. Dep’t of Em-
ployment & Training, 54 Mass. App. Ct. 128 (2002) (separation packages’ pay-
ments were made in exchange for general release of legal claims against em-
ployer and thus do not constitute remuneration disqualifying employees from
receiving unemployment benefits); White v. Dep’t of Employment & Training, 40
Mass. App. Ct. 249 (1996) (payment made in exchange for release of legal
claims against employer was not remuneration and thus did not disqualify em-
ployee from receiving unemployment benefits). That means the client can begin
to collect unemployment benefits immediately, without waiting for the severance
period to end.

In addition, in appropriate cases the language to be used on the unemployment
application forms can be specifically referenced.

         The Company agrees that in response to any request from the
         Massachusetts Division of Unemployment Assistance (DUA)
         for the reason for Ms. _____’s separation from employment,
         the Company will check one of the following boxes on DUA’s



17–24                                          2nd Edition, 1st Supplement 2010
SETTLEMENT AGREEMENTS; RELEASES                                            § 17.4


        “Unemployment Insurance Request for Information” form
        (Form 1074W):

           Laid off or hours reduced by Employer

          Released due to inability to meet performance standards. /
        No misconduct or violation of company rules or policy.

Note that the employer’s selection of one of these choices on the “Request for
Information” form ordinarily results in the Division of Unemployment Assis-
tance simply approving benefits and not conducting further fact finding with the
employer.


§ 17.4.4 Prospective Releases
Releases should be only for claims that arose during the employment relation-
ship up to the date of the agreement. Future claims arising out of a future rela-
tionship should not be released (and, indeed, cannot be released under OWBPA).
Hence, the agreement should make it clear that the only claims released are
those arising before the agreement is executed.

        _______ hereby . . . releases all claims that she ever had, now
        has, or can, shall, or may have, by reason of, on account of, or
        arising out of any matter . . . that has happened . . . at any
        time up to the date she executes this Agreement . . . .

Note that the following nonrecommended language could be read improperly to
preclude the employee from bringing claims against the employer arising out of
future transactions.

        The Employee specifically releases the Company from all
        claims of any kind, whether or not asserted prior to the effec-
        tive date of this agreement, arising out of his employment, the
        termination of his employment, or any of his dealings with the
        Company, including any common law or statutory claims . . . .


§ 17.4.5 Who Is Being Released
Agreements should specify who is being released. Subsidiaries, affiliates, and
parent corporations should be included, as follows:

        This agreement (the “Agreement”) is entered into between the
        Company, on its own behalf and on behalf of its officers,

2nd Edition, 1st Supplement 2010                                           17–25
§ 17.4                            DRAFTING EMPLOYMENT DOCUMENTS


         agents, directors, employees, subsidiaries, affiliates, assigns
         and successors (collectively, “the Company”).


§ 17.4.6 Who Is Obligated and to Whom
Related to the issue of who is released is the issue of who has obligations and to
whom the obligations run. It is useful to include a clause creating an affirmative
duty on the part of the employer to ensure assumption of the agreement in the
event the business is sold.

         The Company agrees to ensure that any obligation or remain-
         ing obligation to Ms. _______ under this Agreement shall be
         assumed by any successor in interest to the Company.

Also, should the employee die before the employer has completed its severance
obligations, the employee’s estate should obtain the benefits of this agreement.

         If the Employee dies prior to the end of the Severance Period
         described in Paragraph _____ above, then within _____ days
         of its receipt of a copy of the Employee’s death certificate, the
         Company will pay the total of all remaining severance payments
         in a lump sum to the Employee’s estate.


§ 17.5       BREACH/ENFORCEMENT

§ 17.5.1 Mutuality
Care should be taken to ensure mutuality of obligation in the agreement in the
event of breach. The language of an agreement must make clear that if a breach
occurs, the obligations of both parties terminate. For example, an employer
should not be empowered to cease payments to the employee, and yet be able to
demand that a former employee continue to abide by a noncompetition provision.
The same requirement of mutuality should apply to other enforcement terms, as
well. Note the change in the language presented below regarding interpretation
of the agreement. In the first example, the employer’s language provides that
only the employee agrees that the written settlement represents the entirety of
the contract. In the second example, both parties agree.




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SETTLEMENT AGREEMENTS; RELEASES                                             § 17.5


The employer’s language:

         Representations: Ms. _____ affirms that the consideration for
         signing this Agreement is the terms stated herein; that no other
         promises or agreements of any kind have been made to or with
         her by any person or entity whatsoever to cause her to sign
         this Agreement; and that she fully understands the meaning
         and intent of this instrument.

The employee’s language:

         Representations: Each party affirms that the consideration for
         signing this Agreement is the terms stated herein; that no other
         promises or agreements of any kind have been made by any
         person or entity whatsoever to cause either party to sign this
         Agreement; and that each party fully understands the meaning
         and intent of this instrument.


§ 17.5.2 Process for Enforcement with Alternative
         Dispute Resolution
The employer typically benefits from clauses that allow cancellation of the
agreement and court proceedings for enforcement as remedies to one party for
the other party’s breach. Typically employees benefit from a streamlined, effi-
cient enforcement mechanism.

It may be to both parties’ benefit to include a provision for arbitration or some
other alternative method for resolution of disputes, rather than leaving the courts
as the only option. The excerpt below requires notice and an opportunity to cure,
followed by expedited arbitration upon material breach of the agreement.

         All payments to be made to Employee in accordance with the
         terms of this agreement, and the performance by the Company
         of its other obligations hereunder, shall be conditioned on
         Employee’s performance of Employee’s obligations hereunder
         without material breach. If the Company decides, in reliance
         upon the preceding sentence, not to make any such pay-
         ment(s), it shall provide Employee with not fewer than 14 cal-
         endar days’ notice before implementing such decision in order
         to afford Employee an opportunity to respond to and/or rem-
         edy Employee’s alleged nonperformance of Employee’s obli-
         gations under this letter agreement.



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§ 17.5                            DRAFTING EMPLOYMENT DOCUMENTS


         Any claim by either party that the other party has breached its
         obligations under this agreement shall be settled by final and
         binding arbitration before a mutually acceptable arbitrator in
         accordance with the applicable rules for expedited arbitration
         of the American Arbitration Association as then in effect, in-
         terpreted so as to provide for a speedy and just remedy.

If the case has been settled through mediation, the mediator can be named as the
arbitrator to resolve such disputes.


§ 17.5.3 Applicable Law
It is important to be specific about the appropriate jurisdiction and body of law
that applies to interpretation and enforcement of the agreement.

         Governing Law. This Agreement is made and entered into in
         the Commonwealth of Massachusetts, and shall in all respects
         be interpreted, enforced, and governed under the laws of said
         Commonwealth.


§ 17.5.4 Liquidated Damages
Employers often attempt to insert liquidated damages clauses that require a
payment of a set amount, or a forfeiture of some or all of a severance payment,
for violation of confidentiality, nondisparagement, or waiver provisions in the
settlement agreement. However, liquidated damages clauses that constitute a
“penalty” will not be enforced under Massachusetts law. In Massachusetts, a
liquidated damages clause constitutes a penalty where the actual damages for
which liquidated damages purport to substitute are easily ascertainable and where
the stipulated sum is “unreasonably and grossly disproportionate to the real dam-
ages.” A-Z Servicenter, Inc. v. Segall, 334 Mass. 672 (1956).

The authors advise against agreeing to the inclusion of liquidated damages pro-
visions in settlement agreements. However, if such terms are included, the
agreement should contain at minimum some process or mechanism to fairly de-
termine the parties’ entitlement to the damages sought, rather than assessing the
damages automatically.

         In the event that a court of appropriate jurisdiction determines
         that there has been a knowing breach by Employee of the confi-
         dentiality provisions of this paragraph, in addition to any equi-
         table relief awarded by such court, Employee agrees to pay the
         Company for each such violation $____, as liquidated damages

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SETTLEMENT AGREEMENTS; RELEASES                                                  § 17.5


         and not as a penalty, up to a maximum liquidated damages
         amount of $____. For purposes of this paragraph, “each such
         violation” shall be defined as an instance in which the Com-
         pany demonstrates that Employee has specifically breached the
         confidentiality provisions of this paragraph by knowingly mak-
         ing an unauthorized disclosure to one person or to more than
         one person simultaneously. Notwithstanding any other provision
         of this agreement, it shall not be a violation of this agreement
         for Employee to respond to inquiries about the status of the
         Civil Action, from persons previously aware of the existence of
         the Civil Action, by informing such persons that the Civil Action
         has been resolved to the satisfaction of the parties thereto.

Alternatively, the parties could agree to pursue alternative dispute resolution, if
the employer thinks the employee has breached the terms of the confidentiality
section. See sample language in § 17.5.2, above, describing alternative dispute
resolution mechanism for breaches.


§ 17.6        VALIDITY/SEVERABILITY
Employers will often insist upon a clause that provides that if a particular provi-
sion is found to be unenforceable, the rest of the agreement remains intact (as
shown in the first example below). The problem with such a clause is that the un-
enforceable provision may be so essential to the agreement’s intent that the provi-
sion’s invalidation renders the rest of the agreement pointless. It is simply illogical,
for example, for the release obligation to survive if the payment obligation is nulli-
fied, or vice versa. The employee’s language, given in the second example below,
distinguishes between material and nonmaterial provisions found to be nonen-
forceable.

The employer’s language:

         Validity: Should any provision of this Agreement be declared
         or be determined by any court of competent jurisdiction to be
         illegal or invalid, the validity of the remaining parts, terms or
         provisions shall not be affected thereby and said illegal or in-
         valid part, term or provision shall be deemed not to be part of
         this Agreement.

A better variant from the employee’s perspective is the following:

         Should any provision or part of any provision of the Agree-
         ment be found to be legally unenforceable and/or against pub-

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§ 17.6                            DRAFTING EMPLOYMENT DOCUMENTS


         lic policy, such that the material provisions of this Agreement
         are not affected thereby, such unenforceability shall not pre-
         vent enforcement of the remaining provisions or parts of the
         Agreement. If any material provision of this Agreement is
         found to be invalid or unenforceable, then the entire Agree-
         ment is voidable at the option of either party.


§ 17.7       COOPERATION
An agreement that requires a former employee to cooperate if future litigation is
brought against his or her former employer, concerning events during the
employee’s term of employment, is occasionally required. As in the provisions
below, the plaintiff’s attorney should try to protect the employee from financial
losses if he or she is called upon to fulfill his or her obligation.

         In the event that Ms. _______ is served notice of such legal
         process at any time subsequent to her employment at _______
         and subsequent to the severance period, _______ shall compen-
         sate her for any out-of-pocket expenses she incurs in performing
         her obligation to cooperate with the Company under this
         paragraph. The Company shall also compensate Ms. _____
         for all time spent fulfilling her obligation to cooperate under
         this paragraph, at the same hourly pay rate in effect as of her
         last day of work at the Company.

Note that the above paragraph requires cooperation of the employee only upon
service of process. Even if the employer is unwilling to agree to such a
restriction, the requirement that the employee cooperate should not be without
limits. In the excerpt below, the employee is required to cooperate only where
the employer’s request is reasonable, which is also defined.

         Except as set forth in this paragraph, at the Company’s rea-
         sonable request, the Employee agrees to cooperate with the
         Company in any litigation or administrative proceeding or in-
         quiry that involves the Company about which the Employee
         has any knowledge or information. . . . The reasonableness of
         the Company’s request will take into consideration such fac-
         tors as the urgency of the Company’s need, the Employee’s
         personal and business commitments, the amount of notice pro-
         vided by the Company, and the availability of other witnesses.




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SETTLEMENT AGREEMENTS; RELEASES                                              § 17.8


§ 17.8       NONCOMPETITION AND
             NONDISCLOSURE CLAUSES
Employees in certain industries are often subject to noncompetition and nondis-
closure agreements that survive the end of the employment relationship. The
permissible breadth and enforceability of such clauses are beyond the scope of
this chapter, but negotiated restrictions on the employer’s proposed overbroad
prohibitions on competition and nondisclosure can often provide a valuable ele-
ment of nonmonetary consideration for the employee, and serve as necessary
protections from the threat of litigation by eliminating ambiguity.


§ 17.8.1 Noncompetition Clauses
Employers often write noncompetition clauses that can be read to prevent an
employee from continuing to be employed in his or her chosen profession.
While overbroad clauses are generally unenforceable in Massachusetts, and em-
ployers often do not intend the clauses to be enforced as broadly as they read,
such assurances will provide little comfort to an employee who has recently lost
his or her job and wishes to avoid potential expensive litigation about his or her
right to be reemployed. Accordingly, it is advisable to void the noncompetition
clause entirely, or at least narrow such clauses as much as possible. Often they
can be rewritten so as to protect the employer from the harm about which it is
really concerned, while giving the employee much broader latitude in his or her
job search. This can be accomplished by restricting the noncompetition obliga-
tions to a designated list of the companies that the employer considers to be its
most direct and threatening competitors, or by defining competition narrowly to
mean those specific job functions or products with which the former employee
was actually engaged, or those customers with whom the employee actually
dealt, when he or she departed the employer. The example below reflects the
latter strategy:

         For a period of one year following your separation date, you
         will not directly or indirectly, on your own behalf or on behalf
         of anyone else or any company, (a) solicit in any manner, for
         the purpose of offering or selling a product or service of a type
         sold by the Company, any person or company known to you to
         be a current or prospective customer of the Company with
         whom you had personal contact during the course of your em-
         ployment; or (b) solicit in any manner, for the purpose of of-
         fering or selling a product or service of a type sold or offered
         by you while employed by the Company, any person or com-



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§ 17.8                            DRAFTING EMPLOYMENT DOCUMENTS


         pany known to you to be a current or prospective customer of
         the Company.


§ 17.8.2 Nondisclosure Clauses
As with noncompetition clauses, the nondisclosure clauses written by employers
often exceed what the courts regard as legitimate and protectable interests. Nev-
ertheless, particularly in competitive industries where disclosure of a company
secret or proprietary innovation can threaten substantial loss of advantage, em-
ployers often demand strict nondisclosure clauses. In the following clause, the
employee added language that defines what does not constitute confidential
“company information,” thereby allowing the employer to protect its legitimate
interests while protecting the employee from the threat of litigation over the dis-
closure of already-public information:

         The term “Company Information” as used in this Agreement
         means: (1) confidential information, including information re-
         ceived from third parties under confidential conditions, or (2)
         other technical, business or financial information, the use or
         disclosure of which might reasonably be construed to be con-
         trary to the interest of the Company. The following informa-
         tion will not be deemed Company Information, and you will
         not have any obligation with respect to any such information
         which:

         (a) is or falls into the public domain through no wrongful act
         of yours; or

         (b) is rightfully received from a third party without restriction
         and without breach of this Agreement; or

         (c) is approved for release by written authorization of an offi-
         cer of the Company;

         (d) is disclosed pursuant to the requirements of a governmen-
         tal agency or operation of law; or

         (e) is already in possession of a third party to whom it is dis-
         closed, as evidenced by your records, Company records or re-
         cords of a third party, and is not the subject of a separate non-
         disclosure or confidentiality agreement to which that third
         party is a party.



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SETTLEMENT AGREEMENTS; RELEASES                                                   § 17.9


§ 17.9       WHEN HAS A “FINAL” AGREEMENT
             BEEN REACHED?
Frequently, agreement is reached on a dollar amount for settlement (and/or items
such as letters of reference, employee benefit continuation, and outplacement)
before the settlement instrument itself is completed. After reaching “agreement
in principle,” however, the opposing attorney may insist on additional language
in the text (i.e., refusal to grant mutual releases or confidentiality provisions,
insertion of liquidated damages provisions, imposition of an unreasonable
schedule for payment of settlement) that could be deal breakers. Nevertheless, it
is possible that the agreement reached as to the material terms of the settlement
is enforceable, even if no signed writing exists, such that failure to execute a
final agreement would be deemed a breach. See Situations Mgmt. Sys., Inc. v.
Malouf, Inc., 430 Mass. 875 (2000) (agreement is enforceable even absent exe-
cution of final written agreement where material terms were orally agreed upon
by parties); Alekshun v. Flexcon, Inc., No. 980433B, 2003 WL 22699931 (Mass.
Super. Ct. July 17, 2003) (court enforced settlement of employment discrimina-
tion suit where parties’ attorneys agreed to essential terms via email, but one
party refused to execute comprehensive written agreement).

      Practice Note
      As employee’s counsel, you must decide whether, in the course of
      negotiations, to make clear that no agreement exists until the writing
      is executed or, alternatively, to remain silent on the issue. Remain-
      ing silent (and hence vulnerable to an argument that the agreement
      in principle is enforceable) is preferable only if you are more con-
      cerned about the possibility the employer will renege on the overall
      deal than about troubling terms the employer may attempt to insert
      into the agreement. If you are concerned about the employer reneg-
      ing, or that the employer will attempt to insert troubling terms into the
      agreement, then it is often advisable to commit the material terms to
      writing, whether through a confirming letter or e-mail, or, in the case
      of a mediated settlement, through a memorandum of understanding.
      In the latter case, avoid insertion of a paragraph that states that, in
      addition to material terms, the agreement will include the “usual” or
      “standard” clauses. Those clauses should be itemized and their
      contours specified whenever feasible in order to avoid misunder-
      standings.




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§ 17.10                           DRAFTING EMPLOYMENT DOCUMENTS


§ 17.10      INTERNAL REVENUE CODE § 409A
The employee’s attorney must remember that Section 409A of the Internal
Revenue Code is likely to apply to a severance agreement and must be taken into
account. Originally effective in 2005, Section 409A imposes a complicated set
of rules on all “non-qualified deferred compensation arrangements,” which in-
cludes many severance agreements. Violation of any of the rules can result in
substantial and onerous taxes on the employee (and only the employee, so em-
ployees cannot rely on the employer to address these issues).

The scope of Section 409A is extremely broad, and it encompasses many ar-
rangements that have not traditionally been considered to be deferred compensa-
tion plans. For example, severance payments, expense reimbursements, change
of control agreements, and incentive bonus arrangements can be subject to Sec-
tion 409A, unless they fall within one of several exceptions set forth in IRS
regulations. A deferred compensation plan can include arrangements between
employers and employees, employers and independent contractors, and even
partners and a partnership. A plan can include an arrangement with a group of
employees or a single employee, and it can include arrangements with non–
highly compensated employees as well as highly compensated employees. Pay-
ments to certain specified employees of publicly traded companies are subject to
additional rules, and often payment to these employees must be delayed for six
months in order to comply with Section 409A.

A discussion of Section 409A and other tax issues that arise in connection with
severance agreements is beyond the scope of this chapter. In fact, the provisions
of Section 409A are so technical that a brief description runs the risk of being
misleading. Unless the employee’s attorney is qualified to provide tax advice,
the employee should consider consulting his or her tax advisor, or the em-
ployee’s attorney should consider bringing in someone with tax expertise before
the severance agreement is finalized, with the goal of insuring that the provisions
of the severance agreement are either exempt from Section 409A or comply with
its requirements.




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