Ending an employment relationship outside the United States is often more complex than doing so domestically, making mutual separation agreements (MSAs) a valuable tool for multinational employers to mitigate risks and ensure compliance with local laws.
Quick Hits
- An MSA is a contract in which both the employer and the employee agree to end the employment relationship by mutual consent, often involving an additional payment from the employer in exchange for a release of claims.
- MSAs are particularly useful in jurisdictions with stringent termination laws and can help employers avoid prolonged disputes or litigation by securing releases of potential employment claims.
- A best practice for employers is to assess local laws, evaluate the risk of unilateral termination, understand enforceability requirements, and finalize a separation strategy tailored to local customs and expectations.
MSAs Explained
Unlike the at-will framework familiar to U.S.-based companies, most countries around the world require robust justification or detailed procedures before an employer can unilaterally discharge an employee. An MSA is a contract in which the employer and the employee agree to end the employment relationship by mutual consent. Typically, in exchange for the employee’s agreement to a full and final release of claims, the employer provides an additional payment, often referred to as an ex gratia amount, on top of any statutory termination entitlements. MSAs usually include confidentiality terms to protect the employer and may have other features to make the offer more attractive or enforceable, depending on the jurisdiction.
MSAs’ Value
MSAs are especially valuable in jurisdictions where unilateral terminations are difficult or risky. Local laws may require robust justification or procedures to terminate for misconduct, performance issues, or redundancy. Some countries impose “employment for life” standards, meaning that employment termination is treated as a last resort after the employer has exhausted other options such as reassignment or retraining. In these environments, the core value of an MSA from the employer’s perspective is the release of potential employment claims, thereby avoiding prolonged disputes or litigation. The effectiveness of this release varies by jurisdiction, underscoring the need to align the strategy with local laws and practices.
Evaluating the Need for an MSA: A Four-Step Framework
When deciding whether to pursue an MSA rather than unilateral termination of employment, employers may want to consider a four-step evaluation process.
- Assess local laws: Understand the requirements for employment termination in the relevant jurisdiction, including mandatory payments.
- Evaluate the risk profile: Analyze the risk of unilateral termination based on facts such as the documentation, performance standards, and/or any required remediation steps.
- Understand enforceability requirements: Identify what makes an MSA valid and enforceable in the jurisdiction, such as cooling-off or consideration periods, payments in exchange, required terms, or specific signature requirements.
- Finalize the separation strategy: Align the separation strategy with local customs and expectations, including negotiation approaches, ex gratia payment ranges, and the timing for presenting the agreement.
Step 1: Assessing Local Law
Employers will want to identify what is legally required to terminate employment generally in the relevant country, and map the mandatory termination payments under local law. These requirements may include statutory severance, pay in lieu of notice, and a payout for accrued leave. Together, any mandatory payments form the “floor” for the purposes of calculating the ex gratia amount needed to secure a release.
Step 2: Evaluating the Risk Profile
This step is a facts-plus-law exercise. Can the employer meet the legal standard for employment termination in that country? For a performance-based termination, for example, the employer may want to consider whether the performance documentation is strong and whether any required steps, such as warnings or improvement plans, were properly followed. If the local legal standard is not met, the risk of an adverse outcome increases.
Employers may also want to evaluate the potential remedies and timelines in the relevant jurisdiction. In some countries, unfair termination claims can lead to substantial back-pay awards, and if proceedings typically take a long time to reach judgment, the potential exposure can grow over time. Answering the question, “What could this cost if the employee wins?” helps frame whether an MSA is the better path, and, if so, what ex gratia range makes sense.
Step 3: Understanding Enforceability Requirements
Enforceability considerations fall into two main categories. The first relates to validity requirements. Some jurisdictions impose mandatory notice or consideration periods, require specific clauses, mandate approval through local labor authorities, or even insist on wet-ink signatures to make the agreement valid. Missing any of these can jeopardize the entire agreement.
The second category relates to enforcement outcomes, which vary widely. In some jurisdictions, a valid MSA fully bars later claims. In others, an employee may still bring a claim, but any award is offset by the ex gratia payment already made. In still other jurisdictions, an MSA may neither bar nor offset future claims, but it can deter litigation because the employee has already accepted a negotiated package. These differences directly influence both the decision to use an MSA and the pricing of the ex gratia component.
Step 4: Finalizing the Separation Strategy
When building a separation strategy, employers may want to consider developing talking points tailored to the specific jurisdiction and situation, establish clear negotiation parameters for the ex gratia payment (including a rational opening offer and a firm ceiling), and consider the right time to present the agreement. Tone and process matter enormously in these negotiations. In Korea, for example, it is common for employees to record termination meetings for later use in court, making careful word choice essential. In Finland, authorities closely scrutinize whether coercion was a factor, and if the process appears pressured or intimidating, a court may nullify the MSA. The goal is always a clear, respectful, and voluntary process that will withstand scrutiny if challenged.
Timing and sequencing also require careful thought. In some jurisdictions, such as Taiwan, it can be strategically advantageous to effect the termination first and then negotiate a post-termination settlement. This approach can be important because in certain countries, an employee who files a claim gains protection from employment termination while the litigation is pending. If an employee senses an impending separation and preemptively files, the employer can find itself locked into the very relationship it is trying to end. However, sequencing strategies are highly fact- and jurisdiction-specific and ideally should be coordinated with counsel who understands local nuances.
Regional Variations
Strategic considerations may vary not only from country to country but also from region to region within a single country. China provides a useful illustration. Negotiating an MSA is common in China because unilateral terminations carry significant legal and financial risk. A typical separation package will cover all statutory entitlements (commonly referred to as “N,” representing the minimum severance requirements), pay in lieu of notice, and accrued annual leave. On top of those entitlements, the ex gratia is often described using the formula “N plus X,” where X represents the additional number of months’ pay offered above the statutory minimum.
The X component may vary by location within China. Shenzhen’s market practice, for example, differs from Shanghai’s, and the amount may also depend on local court practices and the nature of the separation. Further, individual separations may carry different expectations than mass redundancies.
Key Takeaways
In conclusion, while consistency in corporate principles is typically helpful, execution must be locally customized to be maximally effective. By following the foregoing guidelines, multinational employers can better navigate the complexities of global MSAs and manage employee separations with greater confidence and reduced risk.
Margaret E. Ventricelli, a practice assistant in the Stamford office of Ogletree Deakins, contributed to this article.
