Friday, February 3, 2012

The Practical Lawyer (No. 2): Confirming The Reason for Termination


December and January always result in a rush of severance work for me, both in terms of drafting contracts for my employer clients and reviewing them for employees.

This week's "Practical Lawyer" is no more than a simple drafting tip. On the employee side, it is important to try and obtain a representation in the severance contract that the employee was terminated without cause. (If he or she were terminated for cause, it is highly unlikely that a severance agreement is even in play.) What is the reason for including this provision? There really are two.

First, it means an employer won't be able to contest unemployment.

Second, it can help the employee find a new job without worrying about a non-compete clause. Many employment contracts provide that non-competes are enforceable only if an employee quits or is fired for cause. An acknowledgment by the employer that the employment was terminated without cause is an admission and would not allow for enforcement.

In some states (New York and Montana), termination without cause means an employer cannot enforce the non-compete agreement regardless of the triggering language in the contract. In most states, it is a factor a court will weigh when considering whether enforcement is reasonable.

Even reaffirmation of a non-compete within a severance contract may not allow an employer to enforce. For starters, courts recognize the difficult economic choice an employee is in when presented a severance. Further, the consideration for the payment is not necessarily the reaffirmed non-compete, but rather the release the employer obtains in the severance contract. Every employee situation is different in terms of assessing what consideration the employer truly received for the severance payment. Finally, the amount of the severance may have an impact. Reaffirming a covenant for two weeks severance pay won't impress a court if it is asked to enforce a non-compete. A year's pay may be a different story.

Employees, therefore, should always request that an employer agree in a severance document that termination was "without cause." In most circumstances, the employer should have no issue with this and should consent to it.

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