An employer sometimes offers a departing employee a severance in exchange for the employee’s release of potential legal claims. When this happens, the terms of the release and any mutual obligations between the employer and employee are reduced to writing in the form of a severance agreement. While it is generally the employer who initially drafts a severance agreement, there is often room for negotiation, both in respect to severance amount and terms.
Every severance agreement is unique, but some basic concepts are common to most.
Parties: Obviously, an agreement needs to identify the people who it binds and almost every severance agreement will do this in the first paragraph. Those bound by the agreement will include the employee and employer. Frequently, the agreement also extends to successors, affiliates, parents, and subsidiaries of the employer. Often, a severance agreement will also expressly state that the owners and/or officers of a company are also subject to its terms.
Separation of Employment: As the agreement is intended to irrevocably sever the ties between the employer and employee, it will specifically state when the employment has ceased. Neutral language like “separation” is preferable to most employees, for obvious reasons, but also holds some benefit for the employer, and, as such, most agreements will not state that an employee has been terminated, even if that is the case.
Severance Payment: This obviously states the amount the employer is paying the employee but it also serves an important legal function. A severance agreement, like any contract, must be supported by consideration (something of value) and so this is critical to the enforceability of the agreement. This section will also usually indicate how payment is to be made. Sometimes the payment is made in a lump sum. Other times, payment is made as a continuation of salary for a specified time. The payment is generally subject to normal withholdings and the agreement will usually state as much.
Benefits: The agreement will specify whether the employee is entitled to continued benefits for a period of time. The agreement will state when the employee’s health coverage on a company plan ceases and provide basic notice of the employee’s rights under COBRA.
Release: The most important section of the agreement, from the employer’s perspective, this section will identify all of the claims and potential claims that an employee is giving up in exchange for the severance payment. With the exception of certain claims that cannot be waived as a matter of law, the employee is usually waiving any claim related to anything the employer did before the moment the employee signs the agreement. If the agreement is the product of negotiation, the release may include a mutual release, wherein the employer similarly waives any right to sue the employee for anything the employee may have done.
ADEA Compliance: If the employee is over the age of 40, she is entitled to 21 days to consider the agreement and may revoke the agreement within 7 days of execution. The agreement will explicitly advise such an employee of this right afforded by the Age Discrimination in Employment Act.
Neutral Reference: Sometimes included in an employer drafted agreement, and usually insisted on by a represented employee, this will spell out how the employer will respond to inquiries from prospective employers.
Unemployment: Frequently, a severance agreement will state that the employer will not contest an employee’s application for unemployment benefits but the agreement will also likely state that the employer will be forthright with the state’s unemployment agency if asked about the severance.
Confidentiality: Like the release, confidentiality generally will apply only to the employee. There will be a carve out allowing the employee to communicate the terms of the agreement with her spouse, attorney, and tax professional. If the employer is subject to a confidentiality provision, there will be a carve out for “need to know” employees, including those necessary to effectuate the agreement (ex. payroll employees).
Non-disparagement: The agreement may state that the employee is prohibited from making derogatory comments about the company. If an employee is able to negotiate this term to impose a reciprocal obligation on the company, the company will limit the obligation to a select group, as it cannot police such a condition across an entire company (it would be impractical to expect the company to keep all of an employee’s former coworkers from speaking ill of her).
Liquidated Damages: Some employers will insist on a financial penalty, sometimes the entire amount of severance that has been paid, if the employee breaches the terms of the agreement. A represented employee may be able to get the company to agree to a mutual provision.
Noncompete/Non-solicitation: If an employee has already entered into such an agreement, it will usually be reiterated in the severance agreement. Even if the employee was not previously subject to such restraints, a severance agreement may incorporate new restrictions. This is another area that is often the subject of negotiation between the employee and employer.
No Current Claims: A severance agreement will often require an employee to make a representation that they have no current claims and are unaware of any circumstances that might give rise to the types of claims that cannot be waived as a matter of law, like a workers’ compensation claim.
Payment of Wage and Benefits: A severance agreement will likely recite that the employee agrees that she has been paid all monies owed, including any applicable overtime wages, vacation time, reimbursable expenses, stocks, stock options, etc.
If you have been offered severance, it is vital that you know if you have potential claims against your employer before signing the severance agreement. A potential claim would give you leverage in negotiating a better severance package. Potential claims include discrimination, age discrimination, pregnancy discrimination, discriminatory harassment, sexual harassment, retaliation, whistleblowing, workers’ compensation retaliation, Family and Medical Leave Act violations, minimum wage or overtime. If you are unsure, contact an employment law attorney to discuss the facts and circumstances surrounding your termination to make sure you are not waiving any potential claims.