In our current age of downsizing and cost-cutting, many good employees are finding themselves without a job through no fault of their own. With money scarce, employers may be less generous with severance payments. And with jobs scarce, employees may feel that they need the severance to help tide them over until they can find suitable alternative employment.
Generally, employers are not obligated by law to provide any severance to any employee. Some employers, however, have decided to voluntarily adopt severance policies, with criteria and formulae for determining such payments. Other employers might decide, on a case-by-case basis, to offer severance as a reward for service, to obtain finality and/or to avoid potential litigation.
Assuming that your employer has given you a severance agreement, you should not feel pressured to sign it on the spot. In fact, under the federal Older Workers Benefit Protection Act (and some state laws), you must be provided a certain amount of time to review the agreement if you are asked to waive age discrimination or certain other claims, as detailed in 12 below. Additionally, some provisions may be a bit confusing or seem to be “legalese,” and you should make sure that you understand what rights you may be giving up or what obligations you may now be taking on. Nor should you assume that all terms are non-negotiable; there may be leeway for certain provisions.
Following are some of the more common provisions contained in severance or separation agreements (I use these terms interchangeably in this post).
1. “Wherefore” clauses. Separation agreements frequently contain a few introductory paragraphs, setting out the employee’s title and/or responsibilities, and the reason that the parties are entering into the agreement, e.g., “as a result of a reorganization,” “due to mutual dissatisfaction,” “desire to amicably resolve and settle in full any and all obligations and/or claims that Employee has,” etc. While these may not have any legally enforceable significance, employees should make sure that these clauses are accurate. For example, if you were fired, it should not say that you voluntarily resigned.
2. Termination Date. The separation agreement almost always specifies the last day of employment, to ensure that there are no misunderstandings, and to make sure that the employee is paid all amounts due as salary. In addition, all vested and unused vacation days and other paid time off must be paid to the employee within a certain amount of time after the last day of employment. Employees should be aware that, under law, these amounts must be paid whether or not the employee signs a severance agreement.
3. Consideration. “Consideration” is what the employee gets in exchange for the release of claims (discussed in 4, below). This is obviously one of the key provisions of the separation agreement. Any amounts specified in this provision must be in addition to anything that the employee would otherwise be entitled to receive. For example, if the employee is otherwise entitled to vacation pay, bonuses or commission, or would be entitled to severance under an employment agreement or enforceable policy, these would generally not be “consideration” for signing the agreement. While payment of money is the most common form of consideration, it may also include the employer’s agreement to continue COBRA payments, outplacement services or other things of value to the employee. The payments may be either in a single lump sum or over time; employees should carefully consider these alternatives, as there may be tax issues, as well as legal consequences (payments over time may be considered an employee benefit plan under the federal Employee Retirement Income Security Act of 1974 (ERISA), which may have impact which is too complex to discuss at length here). Depending on the way that the payments are characterized, this may also have an impact on the employee’s right to receive unemployment insurance in certain states. Further, while rare, payments over time might also raise issues under a subsequent employer’s conflict of interest policy.
4. Release. This provision specifies what the employee is giving up in exchange for the employer’s consideration: the right to sue and possibly get additional money. This provision usually contains a laundry list of various federal and state statutes, as well as common law claims (e.g., breach of contract, mispresentation, infliction of emotional distress, slander, etc.) Employees should make sure that the agreement specifies that they are not giving up (i) claims that might arise after they sign the agreement, (ii) the right to enforce the agreement, (iii) any workers compensation claims that they might have filed, (iv) any claims to vested benefits under any retirement or pension plan or (v) any claims that cannot be waived by law. It is also common for the agreement to provide that the employee has not, and will not, file any claims against the employer; employees should be aware, however, that the Equal Employment Opportunity Commission (EEOC) has stated that, while employees can waive the right to collect additional money, they cannot waive the right to participate in an EEOC investigation. Again, this provision should be reviewed carefully, to ensure that the employee knows what he or she is giving up, and that the release is legally enforceable.
5. Non-Admission of Liability. Many agreements specifically state that the employer is not admitting that it is liable, and that it does not believe that it owes any money to the employee, but that it is doing so simply to resolve any claims that were, or could have been, raised.
6. Confidentiality and Non-Disparagement. Severance agreements frequently contain explicit provisions that the employee cannot divulge the terms of the agreement to anyone (other than family, legal advisor and accountants) without the company’s permission. The agreement will also frequently prohibit the employer from making any disparaging or derogatory remarks about the employer, its officers, directors and employees. Employees should consider requesting mutual non-disparagement clauses (including a provision that, in response to reference requests, the employer will provide only dates and titles).
7. Confidential Information and Non-Competion. Employees are frequently required to sign confidentiality and/or non-competition agreements upon their hire. Any similar provisions in the severance agreement should not be more restrictive than they originally signed; employees may also consider asking for reductions in the length or scope of their existing non-competition agreements (it should also be noted that some courts are less likely to enforce these agreements as written if the employer fires the employee).
8. Return of Company Property. It is reasonable for employers to expect employees to return all keys, credit cards, laptops, security passes and confidential documents. Employees may want to check whether they can keep certain non-confidential or non-proprietary information as part of their portfolio or to demonstrate to prospective employers the type and quality of the work that they produced.
9. Cooperation. Depending on the employee’s position, the employer may want to ensure that the employee will be available for consultuation or cooperation with current or future investigations, litigations or other matters. The employee should consider asking for reimbursement for expenses associated with this cooperation.
10. Unemployment Compensation. Separation agreements may explicitly provide that the employer will not contest unemployment benefits. Again, if this provision is not contained in the agreement, the employee may consider requesting its inclusion.
11. Liquidated Damages. Some separation agreements provide that, if the employee violates the confidentiality, non-disparagement, non-competition or other provisions, the employee has to give back a portion of the severance payments, and/or that the employee could be liable for other damages, including attorneys’ fees, as well as injunctive relief from the courts. Clearly, the employee should carefully review this provision before signing the agreement, and may want to consider negotiating changes, as appropriate.
12. Time to Consider and Revocation Period. The Older Workers Benefit Protection Act provides that employees who are over 40 must be given at least 21 days to review the agreement; if they are not given this length of time, any waiver of federal age discrimination claims may be voided. If the employee is let go as part of a reduction in force, the employer must provide the employee at least 45 days, and must provide information regarding ages of employees who were not subject to the reduction in force. Employees should note, however, that they are not required to wait this length of time to sign the separation agreement; they can sign as soon as they feel comfortable. In addition, the employee has seven days to revoke the agreement after signing it. As a result, however, employees should be aware employers generally will not make severance payments until at least 8 days after the agreement is signed.
THE FOREGOING IS GENERAL INFORMATION ONLY, AND DOES NOT, AND SHOULD NOT BE CONSIDERED, LEGAL ADVICE. YOU SHOULD CONSULT AN ATTORNEY IF YOU SEEK ADDITIONAL INFORMATION OR NEED LEGAL REPRESENTATION.