All About Severance Agreements
Severance agreements, also known as separation agreements, are important to consider for most employees if they are laid off or terminated from their employment. For those granted a voluntary separation package, severance can also be relevant. Broadly speaking, a severance agreement is a contract between an employee and employer at the end of the employment relationship. In most circumstances, a more formal severance agreement will be provided by the employer. While severance payments are typically statutorily regulated by law, a severance agreement may increase the amount received by the employee. A well-drafted severance agreement can also legally limit the types of entitlements of an employee upon termination, such as the value of the severance package received.
From a legal perspective, employees who sign severance agreements that are legally enforceable, have given up certain valuable rights, such as the ability to sue their employer for wrongful dismissal. The theme behind an enforceable severance agreement is that in exchange for the contractual benefits beyond any statutory benefits (or at least more than the statutory minimum), the employee will not be bringing a lawsuit against the employer in respect to the loss of their job . Consequently, unless an applicable exception applies, signing a severance agreement will mean that the employee cannot sue or otherwise bring a claim against the employer for wrongful dismissal or conversion of a fixed term contract to an indefinite term, or any other claim arising from the employment relationship and/or termination of the employment.
Severance agreements are relevant to all employees where the employment relationship comes to an end, regardless of the cause of the end of the employment relationship. The purpose of a severance agreement is to provide the employer with security that it can move on without the risk of litigation. In contrast, the purpose of a severance agreement is not to provide security to the employee, but is rather to provide the employee a potentially larger severance package than otherwise statutorily entitled, in exchange for giving up any claims they may have against the employer for wrongful dismissal, conversion of a fixed term contract to an indefinite term, or other causes of action.
The Upsides and Downsides of Signing a Severance Agreement
Pros and cons of signing a severance agreement.
Signing a severance agreement can provide an employee with many benefits. Severance is generally paid as a lump sum payment and can be a substantial sum. It can smooth the transition to the next job. In cases where an employee feels slighted or wronged, the financial payment can be a way of addressing the employee’s concerns. For example, an employee may have been wrongfully terminated in violation of his or her employment contract or a state or federal law against workplace discrimination or harassment. Signing a severance agreement and release of claims can be an opportunity for the employer to save litigation costs as well as for the employee to receive compensation for these legal violations. However, signing a severance agreement can also have disadvantages. For example, the release of claims can preclude the employee from bringing legal claims in the future in some cases. The release is usually a broad release and may prohibit claims that the employee may not think are being released. Thus, it is important to read and understand what is being given up before signing a severance agreement. As explained above, the severance agreement will likely include a broad release of claims. One area that the release will not apply is to claims filed with the Equal Employment Opportunity Commission (EEOC). Sometimes if the employer learns that the employee is going to file a charge, the employer will offer severance in return for a release of the EEOC claim nevertheless. Therefore, if the employee has already filed a charge with the EEOC, he or she may want to ask the EEOC what effect the release would have on her rights with the EEOC.
Legal Ramifications of Signing the Agreement
In addition to practical considerations there may also be legal implications of signing. Sometimes a severance agreement will include language requiring the employee to waive certain rights. For example, the waiver may require the employee to waive the right to sue the company for unlawful discrimination. Even if the employee waives that right in the severance agreement, however, the company cannot avoid liability if it is guilty of unlawful discrimination. Sometimes, employers like to put language in the agreement that prevents the employee from pursuing a claim against an individual supervisor or other employee of the company. This language is not valid as employees cannot say on their own behalf to give up their right to sue an individual employee who may have violated the law. Moreover, while some severance agreements require an individual’s signature, we recommend that an employment contract be signed between the individual and the company.
Often times the severance agreement will provide that the amount of money that the company has offered to pay the employee is contingent on finding out that the employee has filed no wage claims or other administrative claims with the New York State Department of Labor, Equal Employment Opportunity Commission ("EEOC"), Human Rights Commission, Wage Hour, or other federal, state, or local governmental agency. These provision are not enforceable because they violate law prohibiting employer waivers of employees’ rights to file wage claims (New York Labor Law Section 215), National Labor Relations Act Section 7 rights (29 U.S.C. Section 157), and rights to file EEOC charges.
Negotiating for More
Many severance agreements contain boilerplate legal language. But, a lot of these agreements also have room for negotiation. Common provisions that are negotiable are those that limit the employee’s ability to find another job, those that inhibit the employee’s ability to speak out about the employer, and many other issues. For example, the length of time the employee waives the right to sue or why it can be revoked may be negotiable. Sometimes employees try to negotiate an extension of health benefits through the employer.
Negotiating often focuses on the key provisions, such as always keeping your severance payment and separation agreement confidential. If the employer says no, find out why and see if you can work around the concern .
Also, if it appears that your employer is not increasing the severance benefits after negotiations, it may not be worth pursuing the negotiations any further. If your employer is no longer negotiating in good faith, there are a few warning signs.
Stripping business terms from the severance agreement
Negotiating the business terms in a severance agreement is worth the effort especially in a case where the employee has lost their job or will be leaving the company because the employee is going to a competitor or starting his/her own competing business. In these cases, the employer is sometimes willing to drop certain business terms in order to avoid future litigation.
When Contacting an Attorney is a Good Idea
Consulting an attorney before signing a severance agreement can be very helpful, and frankly, might be one of the best decisions you make regarding your job or career. For example, if you are over age 40 and you are being provided a "release" with a severance package, you should at least visit with an attorney to review the proposed severance agreement. That’s because under the Older Worker Benefit Protection Act (OWBPA), there are specific requirements an employer must follow when asking an employee who is over 40 to give up the right to bring a claim (sometimes called a "release"). In fact, compliance with the OWBPA is essential for the release to be valid. The OWBPA requires, among other things, the employer to provide you with more time to consider the severance agreement than would otherwise be required under the law. Without the additional time period, the severance agreement is considered unenforceable by the courts.
Let’s assume that a 63-year-old engineer is brought into the Executive’s Director’s office and told that his position is being eliminated and that he will be provided severance pay, health benefits for 12 months (paid for by the former employer), outplacement services, and a bonus based upon company performance. Great package, right? Maybe, but hold on. If the employee is over 40, the former employer must provide the employee with an additional 21 days to consider the severance agreement, and fourteen days to revoke acceptance of the severance agreement after it has been signed. This standard is in addition to the regular seven days to consider an agreement and revoke the agreement after signing required by federal law. So the employer must give a 63-year-old employee 28 days (21 +7 +7) to sign a severance agreement that is worth $300,000!
But sometimes, even if the agreement is deemed unenforceable because the former employer didn’t comply with the OWBPA, signing the agreement can be a good idea. For example, if the former employer’s valuation of the business is fairly low, and the stock is expected to appreciate in the coming years, the business person should consider accepting the lower valuation for more of the severance benefits. Then, in a couple of years, because of the lower basis in the stock, the former employee might be subject to a greater capital gains tax.
Also, if the payout of the stock or other benefits is limited to the stated severance package, the business person should consider accepting the severance package because the employee will receive those benefits. On the other hand, if the severance eligibility language states that the employer can also terminate the employee for cause and do away with the severance benefits all together, don’t sign it.
Another example is the attorney who has been offered an equity interest in a law firm, but the payout of that equity interest isn’t contingent upon the departure of other partners and the employment agreement is at-will (you are no longer guaranteed a paycheck for not working) and the income is subject to self-employment taxes. One way to offset those concerns is to approach the former employer about whether the initial payout can be part of a severance agreement that continues in existence for some period of time regardless of whether the attorney is terminated. As discussed above, there are situations where sending the company a severance agreement is to the benefit of all parties.
So, like in many legal situations, consulting with an attorney can help you make the right decision regarding what is best for you.
Options Other Than Signing
Alternatives include:
The most obvious alternative to signing a severance agreement is to hire a private attorney to review it. This should be your first step if you think that the severance agreement may be worth more than it appears at first glance. It might also be that an employment attorney can negotiate a deal more favorable to you, whether that’s an increase in the severance package or concessions that you need that aren’t even on the table. In some cases, you may be able to negotiate without an attorney. It never hurts to ask your employer for concessions such as additional severance pay or health insurance coverage for a reasonable period of time . Sometimes, an employer will not be willing to negotiate on the severance agreement, but may be willing to negotiate on something unrelated to the severance agreement. If you have been terminated without good cause, depending on the state in which you work, you may be able to file a claim for unemployment benefits. This could last you several months and provide some income. Sometimes, employees may be better off petitioning for unemployment insurance rather than trying to negotiate a severance package that may be significantly less than the unemployment benefits they can obtain for the same or longer period of time.