Understanding Severance Agreements
Severance agreements are contracts used by an employer and employee (or former employee) to mutually resolve the terms of the employee’s departure from employment. In addition to the basic termination language, severance agreements often contain references to continuing obligations after termination and the entitlement to compensation or other benefits in exchange for a waiver of claims.
From an employer’s perspective, a severance agreement offers important protections, including a general release of claims, a general confidentiality provision, and return of company property. From an employee’s perspective, a severance agreement typically provides some compensation or consideration upon the termination of the employment relationship, which can include severance pay, payment for unused paid time off, reimbursement of certain expenses and/or the continuation or payment of medical, dental, and life insurance benefits. Some severance agreements also restrict or prohibit competition by the employee for a specified period of time after separation. The purpose of these additional terms is to reduce the risk of litigation and to provide an employee with the economic opportunity or "cushion" to continue looking for a new position, rather than immediately having to take a job that may not be a good long-term fit simply to make ends meet.
Severance agreements can be offered in a variety of contexts, including to an employee who is being involuntarily terminated by the employer for any reason other than performance of the employee’s job duties. Severance agreements can also be offered in connection with voluntary departure programs , such as an early retirement or early separation packages offered to certain employees who are selected based on specified criteria established beforehand, such as age, tenure or other legitimate business reasons.
There are employment laws that govern the terms of severance agreements. Specifically, the Older Workers Benefits Protection Act ("OWBPA") addresses the circumstances under which a release of claims by an employee over the age of 40 is considered legally binding. In addition to providing certain list of rights that the employee can waive through the execution of a release, the OWBPA requires that if the employer requires a release of an employee age 40 or older, the employer must provide affected employees with written notice of specific information. This notice must be provided with enough time for an employee over age 40 to consider the offer to sign the release (the OWBPA requires that the employer provide at least 21 days for employees to consider the release, but this is often increased to 45 days in practice) and after signature, provide the employee with seven (7) days to revoke the release after execution. Of course, the statute requires that the release must be knowing and voluntary and an employer should also understand that employees who sign OWBPA releases are entitled to revoke their releases within seven (7) days of signing. Revised DOL Regulations that apply to OWBPA releases focused on the waiver of ADEA age discrimination claims (the Age Discrimination in Employment Act) through layoffs became effective April 22, 2009.
Common Red Flags to Avoid
When reviewing a severance agreement, there are some common red flags that you should be on the lookout for because they could indicate that the employee may not be receiving fair compensation. Some examples of red flags that should be thoroughly scrutinized include:
Non-Compete or Non-Solicitation Provisions
Any language that restricts the ability of employees to work for competitors or solicit customers can be a major concern. The difficulty is that, if enforced against you, a non-compete or non-solicitation could affect your ability to get a new job. Or, if you violate the agreement, you might end up in litigation.
Even if the employer is not currently a competitor, some employers have been known to include overly broad restrictions in severance agreements in the hope that the employee will be scared off from seeking other opportunities. Try not to be intimidated into thinking you have forfeited your rights simply because of the employer’s position of greater strength.
Vague Wording
Language that is ambiguous and not precise could have a significant effect on how the agreement is interpreted or understood, now or in the future. For example, you need to know exactly what it means to keep proprietary information confidential and not publicly disclose it. If the employer tries to prohibit you from disclosing information about the severance agreement as part of a separation package and then turns around and contradicts the agreement’s meaning, it could put you in an uncomfortable situation months or years down the road.
Non-Disparagement Clauses
These clauses, which are found in many severance agreements, tend to go both ways. In other words, the employer often agrees not to disparage the employee in any way, but the employee agrees to the same thing for the company. It is not uncommon for these clauses to be particularly broad. These clauses are often not worth the paper they are written on because they may prove to be difficult to enforce.
Significance of Legal Consultation
A legal professional review of your severance agreement is crucial to spotting issues that may not be obvious to the untrained eye. Most severance packages are drafted with a spirit of cooperation, but there may be concerns buried in the fine print that an employee needs to be aware of, and which should be addressed before the agreement is signed. How long is the severance period? Are there salary payments due as well as health benefits? Is the severance payout subject to a reduction in case the employee finds a new job? Many times, these issues come up even though neither employee nor employer intends them. These typographical errors or mistaken misunderstandings arise from the collaborative process between parties and their counsel. Because there is a flow to the negotiations and changes are being made sometimes in different drafts, it is easy for parties to unintentionally overlook key points. A lawyer-standard review will ensure that no such mistakes are present. Moreover, having a lawyer review the final agreement before signing is also important when it comes to waivers of certain rights. Generally, severance agreements contain releases of legal claims between the employee and the employer that might otherwise be available to the employee. Some states treat these releases much differently however. Virginia, for example, views this type of release as a contract as opposed to a waiver of statutory rights, and therefore the action constitutes a strict liability offense for employers who try to present them to employees. At minimum, the agreement must be voluntary without coercion, (which is highly unlikely with both parties being represented by counsel), and the terms must be completely comprehensible to the employee. While many employers do not like to prolong the termination process, sometimes it is worth everyone’s time to have a lawyer review the agreement. In particular, it helps in identifying potential problems. It also avoids the unseemly situation of the employer having "now reverted back to their multiple affordances" after the agreement has been signed.
What are Waivers and Releases?
A series of waivers and releases in a severance agreement come with their own set of legal language and specific requirements. These provisions, if not reviewed carefully by an attorney, can translate into the employee unknowingly giving away salary, retirement benefits, severance and other agreements with no additional compensation from their employer: essentially severing all ties. Severance agreements like these should be reviewed to determine what the employee is getting for what they are giving up and whether or not they are giving up more than they are receiving. Many employers will require employees to give certain waivers and releases as part of the severance agreement, including (but not limited to) confidentiality, waiver of rights, general release and waiver of rights associated with discrimination. Before signing a waiver of rights associated with discrimination, the employee should assess how it impacts his or her ability to sue the employer should any issues arise out of the employment relationship. For example, with a general release, the employee should consider what he or she will be
Negotiating Favorable Terms
Should you try to negotiate better terms? Severance agreements are a negotiation, and thus, it is better to ask for more, that to ask for nothing, to potentially leave other benefits on the table.
Here are some tips for trying to improve upon what you have:
- With respect to severance pay, if the amount of pay is based on your position or seniority, ask for more. Even if you would only receive the amount set forth in the calculation, and not the amount you are seeking, the company may be willing to consider offering you the greater amount, in order to avoid the situation where you may take the position that you are not in fact entitled to the lesser amount, and threaten litigation against the company.
- If you have medical benefits through the company , and they are going to expire, ask for the employment-based COBRA benefits (which are typically lower than through state or federal programs.) You should also ask for an extension of medical benefits for your covered dependents.
- If you have stock options, restricted stock units, or equity grants, ask to accelerate vesting of any of those securities.
- If the company intends to include post-employment release language, ask for six months from the date of signing, rather than the typical one year.
- If you would be required to search for employment, ask that the period commence on or around the date on which you sign the agreement, rather than the termination date.
Real-world Cases of Severance Agreement Problems
Case Study #1: Pay with a Catch
Martha has worked for her employer for eight years. Martha is terminated and is handed a severance agreement that offers four weeks of pay. However, upon reading the severance agreement, Martha notices that it states she is paid on a commission basis. Therefore, her severance offer of four weeks’ pay would actually yield only two weeks’ pay because the offer amount was halved due to her commission arrangements. Martha suspected that her former employer had concocted this fictitious story to reduce her severance benefits. And she was correct.
Case Study #2: No Other Income
Peter has also worked for his employer for eight years. Peter learns his employment is coming to an end. When he walks into his boss’ office to discuss his severance package, Peter is handed an agreement that provides that in exchange for severance benefits, he agrees that he will not seek employment with the employer or in restaurant management for one year after his employment ends. Peter complains to his attorney that he is the sole source of income for his family and cannot go one year without work.
Case Study #3: Sign Away Your Rights
Suzie has worked for her employer for six years. One week before her employment ends, Suzie is handed a severance offer of two times her weekly salary. The employer advises Suzie to have the severance agreement reviewed by an attorney. Suzies calls her attorney but does not pursue the severance offer after the employer refuses to allow her to negotiate any of the terms and conditions imposed on her. Several months later, Suzie’s attorney advises that under the terms and conditions of the severance agreement, Suzie has waived her rights to sue in the event the employer later violates some other law such as the Fair Labor Standards Act or the Family and Medical Leave Act. Suzie would like to pursue her legal claims.
Conclusion: Safeguarding Your Rights
Employees are often thrust into a position where they have to sign a separation agreement in a short period of time without knowing the red flags to look for and whether the terms of the agreement are putting their rights in jeopardy. Many readers may not have sufficient time to meet with a lawyer before they have to sign an agreement. This makes it ever more important employees familiarize themselves with how to identify potential issues in a severance or separation agreement . A good rule of thumb is that most good things for employees take time and so, if a severance offer is good, an employer will be willing to let the employee seek legal counsel before signing. Better yet, if the employer agrees to pay for that legal counsel, it is a sign that the employer is on the up-and-up and is treating the employee well.
The key takeaways from this article are: