Cross-Border Catch-Up: Mutual Separation Agreements Across Multinational Jurisdictions

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Kristyn Lambert: Hello and welcome back to the Cross-Border Catch-Up. I’m Kristyn Lambert, joined by my colleague, the newest member of Ogletree’s Cross-Border team, Samantha Duncan. Today, we’re going to be discussing mutual separation agreements, and this is really a great topic for U.S.-based employers because while U.S. employment is at-will, most global employment law schemes do not recognize at-will employment, and thus it can be a lot more difficult for employers to separate employees for things like misconduct or performance, or even redundancy reasons. As a result of this, mutual separation agreements or MSAs, as we’ll refer to them throughout, are common in a lot of countries as a concept, but what we’re going to discuss today is that the approach to MSAs can vary greatly jurisdiction by jurisdiction. Not only can necessary or recommended terms differ country by country, but the timing and strategy of these agreements will also vary across borders. So, to kick us off, Samantha, can you give us a clear definition? What exactly is a mutual separation agreement and how is it used in practice?

Samantha Duncan: Yeah, absolutely. So, a mutual separation agreement or an MSA is a contract where the employer and the employee agree to end the employment relationship by mutual consent. The way that this typically looks is in exchange for the employee’s agreement for a full and final release of claims, the employer typically provides an additional payment, often called an ex gratia amount on top of any statutory termination entitlements. Most MSAs also include confidentiality terms to protect the employer, and depending on the jurisdiction, other features that make the offer more attractive or more enforceable.

Kristyn Lambert: Great. So, MSAs are essentially a structured way to end the employment relationship with risk mitigation built in, right? So, in what situations are MSAs particularly useful for employers globally?

Samantha Duncan: Well, they’re especially useful in jurisdictions where unilateral terminations are difficult or risky. Right. As you said, unlike the U.S., many countries don’t recognize at-will employment and local laws may require robust justification or robust process to terminate for misconduct, whether it be for misconduct, as I said, or performance or redundancy. From the employer perspective, the core value of the MSA is the release, right? You’re paying an agreed premium to close out potential employment claims or to avoid prolonged disputes or litigation. The effectiveness of that release, how much it actually protects you, is going to vary by jurisdiction, which is why it’s important that local law and practice drive strategy.

Kristyn Lambert: So, we understand when they’re useful. When deciding whether to pursue an MSA rather than a unilateral termination, what’s the evaluation framework you recommend?

Samantha Duncan: Sure. So, I think the best way to approach evaluating the need for an MSA is to take it in four steps. The first step is you want to assess the relevant local laws, what’s required to terminate generally in that jurisdiction and what mandatory payments apply. The second step is to evaluate the risk profile of a unilateral termination under the facts that you’re facing. So, think things like documentation, performance standards, or any required remediation, like for example, reassigning an employee. Third, you also want to understand what makes an MSA valid and enforceable in that particular jurisdiction. Things like cooling off or consideration periods, required terms, approvals, or conciliation, for example, from a local labor authority, or even things like small things that you might not think about initially, but things like wet ink signatures that can become big things in certain countries. Fourth, it’s also important to finalize, a separation strategy that aligns with local customs. So, these are things like your negotiation approach, the range for the ex gratia payment. So, we’re talking opening offer to the ceiling amount that you’re willing to offer, and also the timing for presenting the agreement.

Kristyn Lambert: Okay, excellent. So, you mentioned the four steps. Let’s kind of unpack step one. What are the key local law issues that tend to shape the approach an employer should take to these agreements?

Samantha Duncan: Sure. So, I think for employers, they really want to start with the termination law baseline and understanding what that baseline is. Some places are known to have employment for life standards, meaning that the termination is a last resort after the employer has exhausted other options like reassignment or retraining. Understanding that framework matters because it’s often what makes MSAs the practical route. And next, after you kind of understand the termination law baseline, you want to map the mandatory termination payments under that country’s local laws. These are requirements like statutory severance, things like pay in lieu of notice, payout for accrued leave, or any other statutory entitlements. So those altogether are really your floor, right? And only after calculating that floor can you sensibly evaluate the ex gratia payment that might help you to secure a release.

Kristyn Lambert: Bringing us to step two, evaluating exposure if the company goes unilateral. How do you analyze that risk in a disciplined way?

Samantha Duncan: Well, this is a facts-plus-law exercise ultimately. Can the employer meet the legal standard for that country? For example, for performance-based termination, is the performance documentation strong? And were any required steps like warnings or improvement plans followed? If the local standard isn’t met, then the risk increases.

Kristyn Lambert: Right.

Samantha Duncan: And ultimately to evaluate exposure, employers also look at remedies and timelines. In some jurisdictions, unfair termination claims can lead to back pay. And if proceedings in that country typically take a long time to reach judgment, then potential exposure is going to grow as the time goes on.

Kristyn Lambert: Sure.

Samantha Duncan: Answering, what could this cost if the employee wins always helps frame whether the MSA is a better path. And if so, what ex gratia range makes sense for that employer in that situation.

Kristyn Lambert: Okay. So, moving to step three, you mentioned enforceability. What specific validity requirements or enforcement trends should employers be looking out for?

Samantha Duncan: Yeah, I would say these requirements fit into kind of two main buckets. First, the validity requirements bucket, I’ll call it. Some jurisdictions impose mandatory notice or consideration periods.

Kristyn Lambert: Okay.

Samantha Duncan: Or they may require specific clauses or mandate approval through local authorities. They might even insist on wet ink signatures to make that agreement valid. And so, missing these can unfortunately jeopardize the agreement. I would say the second main bucket are enforcement outcomes. In some places, a valid MSA fully bars later claims. In others, an employee might still bring a claim, but any award that they would receive is offset by the ex gratia payment that’s already been paid to that employee. And still elsewhere, an MSA might not bar or offset, so not exactly ideal, but on the same hand, it can deter claims because the employee has accepted a negotiated package. Those differences directly influence both whether to use an MSA and how to price the ex gratia component and build out the MSA to make sure it’s valid.

Kristyn Lambert: So, moving to step four, finalizing strategy and approach. If we were building a playbook for employers kind of generally, right? We can’t assess every nuance in every jurisdiction, but just generally, what’s a playbook for planning and then presenting the agreement to the employee?

Samantha Duncan: When presenting the agreement, you should always consider talking points that are tailored to that presentation.

Kristyn Lambert: Definitely.

Samantha Duncan: And tailored to that jurisdiction and setting clear negotiation parameters for the ex gratia payment. So that means having a rational opening offer that makes sense or would make sense to that employee and a firm ceiling as well and choosing the right time to present the MSA. Ultimately, right, tone and process matter in these types of negotiations. So, I’m thinking in Korea, for example, it’s common for employees to record termination meetings for later use in court, which makes careful word choice essential. I would say other jurisdictions, I’m thinking Finland, for example, authorities really scrutinize coercion as a factor. And ultimately, if the process looks pressured or intimidating, a court may nullify that MSA. So, I would say ultimately the goal is a clear, respectful, voluntary process that will stand up if it’s challenged.

Kristyn Lambert: Absolutely. And I love that you use some examples there. Understanding necessary tone and process and planning accordingly is so important. And you and I also know timing can be very tricky, right? So, talk about a jurisdiction where sequencing the termination and the settlement differently is strategic.

Samantha Duncan: Yes. So, take Taiwan as an example, where it can sometimes be strategic to affect the termination first and then negotiate a post-termination settlement. Right. And so, this is important because in some countries, an employee who files a claim gains protection from termination while the litigation is pending. If an employee senses an impending separation and then preemptively files, you can end up locked into the relationship that you’re trying to end. So, sequencing can mitigate that risk, but it’s highly jurisdictional specific, and it must be coordinated with counsel that understands local nuances.

Kristyn Lambert: Absolutely. And I think that’s such a good point because when you say jurisdiction specific, we’ve been talking about things and giving examples in terms of whole countries, right? But as we know here in the States, their local, regional laws and practices can also influence the strategy, and that’s also true in global markets, right? So, we’ve talked about countries, but can you give an example of a global jurisdiction to illustrate how terms and market practices play out at a more local level?

Samantha Duncan: Yeah. So, I think a good global example of a country where regions are going to play a difference as well when you’re looking at local considerations would be China. So, in China, negotiating an MSA is common because unilateral terminations carry significant legal and financial risk for employers there. And so, a typical package covers all statutory entitlements, like we talked about. In China, that’s commonly referred to as N, and that really equates to minimum severance requirements. And then a package is also going to include pay in lieu of notice, things like accrued annual leave. But on top of those entitlements, the ex gratia in China is often described as N plus X, right? So, it relates to the minimum severance N plus X, which is really the additional number of months pay that an-

Kristyn Lambert: Okay.

Samantha Duncan: Employer’s going to offer. Yeah. And so, it’s a little bit formulaic. I know us lawyers don’t always like to get into these types of algebra components, but we’re going to do our best.

Kristyn Lambert: But that’s what we’re talking about, right? We’re talking about calculations.

Samantha Duncan: Yes.

Kristyn Lambert: And for purposes of the ex gratia payment. And so, in China, the N plus X, letter N plus letter X is kind of how they refer to it for purposes of calculations. Okay.

Samantha Duncan: Exactly. Exactly. And the X component will vary by location as well. So, the X component Shenzhen is going to be different than it is in Shanghai and it’s also going to vary by local court practices and not only kind of what the local practice is there, but also what the separation looks like. So individual separations might have different X components than-

Kristyn Lambert: Okay.

Samantha Duncan: Mass separations or like something like a mass redundancy, right? And I think to illustrate this as an example, there was a pretty widely reported, recent mass redundancy in Guangdong, China. And in that location, one employer offered 2.5 N plus one. That’s quite a large ex gratia payment, but that was a pretty unique situation, and it wouldn’t necessarily be considered standard or recommended in other locations in China. But that example kind of underscores how numbers can move based on region and based on circumstance.

Kristyn Lambert: I really appreciate you making it so clear, that when we say things vary by jurisdiction, that they can vary by country to country, but also there’s some regional variation there as well. So, let’s zero in on the substance of the MSA, of the agreement itself. In terms of core content, what do you consider the must-have building blocks in an MSA generally across jurisdictions?

Samantha Duncan: Right. So, some of these things are going to sound familiar to U.S.-based practitioners or folks that are familiar with kind of general settlement agreements, but they also vary. And so, I would say in a typical MSA, you’re going to see a full and final release of claims, right? As we were talking about earlier, that’s the valued part, the most valued part for employers usually in these types of situations. You’ll typically see kind of a clear acknowledgement, especially globally, that the employer has paid whatever statutory entitlements are required in that jurisdiction. You’re going to see typically a negotiated ex gratia amount that the parties have agreed to. And then things like confidentiality provisions, mechanics about timing and payment or execution formalities to satisfy local validity requirements.

So, then that’s like certain types of signatures or required terms. And then around those core elements, the strategy, again, is jurisdiction led. What must be included to be enforceable, what process steps are necessary, and how that release will actually operate in practice. Is it going to bar, offset, or deter claims?

Kristyn Lambert: So, once you actually have decided to proceed with an MSA as an employer, you have an idea of what the document will look like. You have to present it, right? You have to have the meeting with the employee. Let’s talk about some meeting dynamics. I know that you’d mentioned earlier in kind of discussing the playbook, I think you may have touched on some of these things, but can we discuss for a moment some common pitfalls that employers will want to avoid during the meeting to discuss the MSA?

Samantha Duncan: Yeah. So, I think during the meeting, we definitely have seen issues with recorded meetings, right? So, in jurisdictions where recording is common for these meetings, it’s a common practice locally or it’s permissible and we see it happen, you want to assume that your words may be replayed later in a tribunal in some kind of litigation and so you want-

Kristyn Lambert: Yes.

Samantha Duncan: To keep statements factual, non-threatening, and that’s why that preparation is important. And I think also something that we see sometimes that ends up as a pitfall for employers negotiating these agreements are things like employees kind of having either expectations based on local law or expectations based on the employer’s practice in the past. Right. So, employees might have heard about another offer, whether it’s accurate or not, they may then set their expectations. And so, it’s important to kind of consider that aspect and talk through that with council too.

Kristyn Lambert: I think that’s such a good point. And I think it also highlights not only why it’s necessary to be aware of local law, right, but to be aware of local practice, is this something common in this jurisdiction? And that’s why tailored advice is really paramount. And in addition to the point you made about recorded meetings, I would add to that another point that you already touched on, which is the coercion risk, right? Employers may want to consider providing a reasonable consideration period if the jurisdiction’s requirements or again, local best practice in the jurisdiction suggests it.

Samantha Duncan: Absolutely. I think all of that is very important. And those elements not only protect enforceability, they also support an employee’s perception of fairness and that really can’t be overstated, right? That’s really key to actually reaching an agreement in most cases.

Kristyn Lambert: Such a good point. Such a good point. So, we’ve covered the why an employer may want to execute an MSA—how they should go about that. Let’s circle back to enforcement outcomes for just a moment. How should employers bake enforcement realities into their deal design?

Samantha Duncan: I’m really glad that you raised that because I think that enforcement realities are really going to tailor an approach to an MSA. And if a valid MSA is going to fully bar future claims, then you can justify a higher ex gratia amount because it’s buying you certainty, right? It’s buying you-

Kristyn Lambert: Yes.

Samantha Duncan: This is the end of the relationship. We’re both agreeing and it ends there. And so that’s worth often a higher amount. But on the other hand, if the jurisdiction uses offset, meaning a court might later reduce an award by your ex gratia amount, that pricing might be more conservative because you’re going to potentially still spend money in the future, right, if there is a litigation that follows. The other example where neither bar nor offset is typical, the MSA still has value as a deterrent, but you may kind of calibrate the ex gratia to reflect that the agreement doesn’t foreclose litigation.

Kristyn Lambert: Yes. So, the core is to tie your ex gratia to realistic outcomes in that jurisdiction, not to use a global average, right? From a cross-border perspective, any final strategy notes for multinational employers planning to use MSAs?

Samantha Duncan: Sure. I think just to summarize what we’ve been talking about on this point, you want to really look to local floors first. That means understanding statutory entitlements accurately in each location, including before you price out an ex gratia amount. I would say next, you want to emphasize process, and that might mean track validity requirements. Are there consideration periods, required terms, approvals, et cetera, those things that we discussed so that you can run a clear and respectful process in the jurisdiction of your termination. Lastly, I would say kind of get guidance on the local market literacy, right, understand regional practices and timelines, understand, for example, like China’s N plus X conventions or the recording norms in Korea because they directly affect viability, your negotiation posture and later enforcement. So ultimately consistency in corporate principles is helpful, but execution must be really locally customized to be effective.

Kristyn Lambert: Excellent. Excellent summary. Very impressive summary of all of the points that we made today and excellent insights overall. Thank you so much for the walkthrough, Samantha.

Samantha Duncan: Yeah, my pleasure, Kristyn. Thank you. And thanks for raising all these great points.

Kristyn Lambert: I think that’s probably all the time we have for this episode. We hope this breakdown of global mutual separation agreements helps you as you work through employee separation options in your international markets. Thank you for joining us for today’s Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide.

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