Quirky Question # 184, Should We Offer Mutual Releases to our Ex-Employees?

Question:

We recently terminated one of our employees.  To eliminate the possibility of future litigation with him, we offered him a severance package, conditioned on his execution of a General Release.  He now has asked us to make the release, as well as an unrelated non-disparagement clause, mutual.  Is this a good idea?

Answer:

You have asked whether you should accede to your former employee’s request to make the General Release in the Separation Agreement a mutual obligation. While this might seem like an easy question, warranting a “Yes” or “No” response, the question is a bit more complicated than it might first appear.

As a prefatory matter, let ud begin by complimenting your company for the fact that it is insisting on a release in exchange for a severance package. In our view, too many companies offer severance packages, sometimes quite substantial, without conditioning those benefits on a comprehensive release of claims. This is generous, but it also is foolish. In some situations, the company essentially will be funding the former employee’s ensuing litigation against his former employer.

Years ago, one of our partners represented a company that had historically been able to offer its employees what basically amounted to “lifetime” employment. Although never characterized in that fashion in any company documents, that employment pattern was common and came to be expected by the employees. Unfortunately, national economics changed: demand for the company’s products diminished and the company was forced to engage in a series of reductions in force. Each terminated employee was offered a substantial severance package based on years of service, which was not conditioned on a release. The unintended consequence of this magnanimous approach was that the company was deluged with age discrimination lawsuits. Fortunately, after we defended these lawsuits, none of which resulted in a plaintiff’s victory, the company began linking its generous severance packages, which it continued to offer, to the ex-employees’ execution of a general release. Since that policy change occurred, nearly every separated employee has accepted the severance and the company has not been forced to defend any subsequent claims.

So, as stated above, we start with the kudos – good work on seeking a comprehensive general release from employees being offered a severance package.

The question you pose – whether you should agree to a mutual release – depends on several factors, including:

a)   how important is it that you obtain a release from your ex-employee;
b)   if you do not offer a mutual release, do you think it likely that your former employee will turn down the severance package and initiate litigation;
c)   would litigating your ex-employee’s claims have ramifications beyond just your ex-employee; and,
d)   are there risks associated with releasing potential claims against your ex-employee?

Let’s take a closer look at each of these inquiries.

There are several parts to the first question asked – how important is it that you obtain a release. Do you believe that your ex-employee has any compelling claims against your company? Or, even if the claims are compelling, what is the scope of your company’s exposure? Are there other non-economic reasons your company might be desirous of resolving the dispute with your former employee – adverse publicity; the consumption of management time; other variables? Depending on how you answer each of these questions, you could conclude that the most important outcome is obtaining a resolution, regardless of whether this requires your firm to offer a mutual release. Conversely, if you believe your ex-employee had no legitimate claims that he could assert against your firm, that there was little economic risk even if he prevailed, and that the non-economic variables weigh in favor of litigating if necessary, your company might reach the opposite conclusion.

The second question asked requires you to be somewhat of a clairvoyant. Recognizing that you may not be able to read tea leaves with perfect predictability, here a few thoughts for you to consider. How long has the employee worked for your firm? Has he been a loyal employee? Is he litigious? Was he nearing retirement at the time his employment was terminated? If not, is he likely to find suitable alternative employment sometime soon? Is he angry about the circumstances surrounding his separation? Was his separation handled in a thoughtful, dignified manner that makes him less likely to initiate litigation? Does he still have friends at your company whom he would not want to alienate? As you can see, we’re trying to identify some of the variables that may shed light on the question of whether your ex-employee would be likely or unlikely to reject the settlement offer and instead opt for the uncertain outcome associated with any litigation. Of course, another critical factor in assessing that decision is the size of the severance package. Is it substantial enough that it would deter him from taking actions that would cause him to lose it? Does he have sufficient financial resources to risk losing the severance package?

The third inquiry posed – the ramifications beyond just this employee – picks up on another part of the “should we settle/should we not settle” calculus. In addition to the non-economic variables mentioned above, there also are other considerations that could influence your decision. This includes the possibility that if your former employee rejects a separation package that does not contain mutual releases, and elects to pursue litigation, the claims asserted may create potential exposure to other employees. For example, if you have a female employee with potential harassment claims who declines to settle absent mutual releases and instead sues out her claims, will her lawsuit precipitate litigation by other women harassed by the same person? Even without the risk of other lawsuits, another factor you may want to consider is the impact of the litigation on employee morale. If the former employee is very popular, forcing him into litigation may alienate his co-workers. The question you have to evaluate is whether refusing to provide a mutual release is worth this risk.

Lastly, while the three previous points have encouraged you to consider the downsides to rejecting a mutual release if it jeopardizes the resolution of potential claims, there may be circumstances where a mutual release should be rejected for other reasons. For example, if you suspect the terminated employee of engaging in any types of serious, wrongful conduct, do not accede to a request for a mutual release. This could include behaviors as diverse as embezzlement, assault, or sexual harassment.

We do not have any magic formula for determining whether it is advisable to reject a request for a mutual release. But, if an employee has been terminated for any questionable conduct, providing a mutual release may be inadvisable. Similarly, if the employee’s personnel file is replete with disciplinary notices, performance improvement plans, or other indicators of past problematic behaviors, a mutual release may not be a brilliant idea.

Our only other observation is that you always have the opportunity to test how important a mutual release may be to your former employee. If you simply reject the request for a mutual release, you will quickly learn whether your ex-employee will nevertheless accept your separation package even without a mutual release. If he does and signs your separation package containing a non-mutual release, the problem is solved. If not, you usually will have the option of reconsidering your decision and re-presenting the severance package to your former employee, with the sought-after mutual release.

Finally, in your question, you also inquired about whether non-disparagement provisions should be mutual. This issue implicates some different considerations, only one of which we will touch upon here. The biggest problem with a mutual non-disparagement provision from a corporate perspective is defining which current and/or former employees will be bound by the provision. If the group encompassed by the provision is not defined very, very narrowly, your company will be inviting subsequent problems.

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