What Is a Severance and Release Agreement?
Severance and release agreements are common mechanisms that employers utilize when faced with difficult employment law issues. In its most basic form, a severance and release agreement is an arrangement between the employer and employee wherein the employee receives a payment of some kind in exchange for waiving employment claims they may have against the employer. Employers may elect to offer severance payments as a goodwill measure or to forestall potential legal claims from being filed by the former employee. If the employee is covered by a collective bargaining agreement, there are unique considerations in light of the collective bargaining process. Employees should be aware that accepting severance and release agreements means not only waiving their right to any claims they may have against the employer, but also foreclosing their ability to collectively bargain certain terms and conditions of employment.
A severance and release agreement should provide a ski slope of benefits for the employee. Employers are encouraged to set forth the purpose of the agreement, particularly if it is offered on a voluntary basis. The employer should also provide the specific consideration or payment to be exchanged for the release of legal claims. In addition to settlement payments, employers commonly provide a neutral reference, outplacement services, or an opportunity to extend health care benefits . When an individual accepts a severance and release agreement, it is important to specify whether the employee can work for the employer in the future, or if the relationship is permanently severed. The employer also should draft the agreement in a manner that encourages open communication in the event there is a concern over the payment of wages or other benefits. One essential component of the agreement is the return of property that belongs to the employer.
Employers and employees should be aware of the federal and state laws that relate to severance and release agreements. Federal law affords greater protection to individuals who are age forty and over through the Age Discrimination in Employment Act of 1967 ("ADEA"). Under the ADEA, an employer is required to advise employees of their rights under the statute and provide a seven (7) day time period during which the employee may revoke the agreement. Employers should also note that under the Older Workers Benefit Protection Act of 1990, a severance and release agreement is not lawful if it contains a general release or waiver by an employee who is covered by a collective bargaining agreement. Particularly during this time of economic volatility, severance and release agreements are an important matter that employers and employees may wish to consider in the event separation from employment becomes necessary.
Important Elements of a Severance and Release Agreement
Severance pay is not typically mandated by law, and therefore varies from employer to employer. A Severance and Release Agreement commonly includes severance pay, which is money the employer pays to a terminated employee that exceeds what the employer is legally required to pay. Severance pay may be agreed to in advance as part of the employment relationship, or may be offered after termination of employment in exchange for the release of claims or for maintaining confidentiality.
In addition, other items may be exchanged or obtained through the Severance and Release Agreement. An employee who signs the Severance and Release Agreement may obtain considerations other than severance pay such as: reconsideration for reemployment, health care or COBRA benefits, outplacement services (assistance in finding new employment), assistance with relocation costs, stock buybacks, non-compete waivers, cost-sharing of certain litigation expenses, a neutral reference, contacting prospect clients, and assistance in managing contact with the press. All of the foregoing is intended to benefit a terminated employee as part of a Severance and Release Agreement, and is not obligated by law (consideration is anything of value to the employee).
Legal Issues to Consider When Executing a Severance Agreement
Employers should be aware that there are a number of federal and state laws that impact the severance and release process. For example, pursuant to the Older Workers Benefit Protection Act (OWBPA), an employer may not obtain a valid release of claims under the federal age discrimination laws unless the release meets certain requirements set forth in the OWBPA. Among other requirements, these rules require that an employee over age 40 be given at least 21 calendar days to consider the agreement, that an employee of any age be advised in writing to consult with legal counsel, and that an employee of any age be given at least seven calendar days to revoke the agreement. There are other OWBPA requirements for group terminations, as well.
State law is also implicated in the employee separation context. For example, in my home state of New Jersey, a valid waiver of claims related to workers’ compensation or unemployment benefits must be clear and specific and knowingly and voluntarily entered into by the employee. Employers should also be aware that applicable conscience clauses are sometimes held to prohibit releases of claims related to religious practice. Finally, as I have written about before, separation and release agreements are not uncommon subjects of National Labor Relations Board scrutiny.
Negotiation of a Severance Agreement
Before signing any severance agreement, it is important to have your attorney read it to make sure it is fair and lawful. The employer will usually seek to have the severance agreement signed as a condition of receiving any severance benefits. As a general rule, the larger the severance package, the more concessions the employee will be willing to make before signing the agreement, but that is not always true. Many employers seek to have a severance agreement signed even when very little is being offered by way of severance, perhaps because the employer believes it is a good idea or because many companies have so-called "standard" practices that call for the use of severance agreements in employment separations whether or not benefits are provided.
Sometimes you may be asked to sign a draft of the severance agreement that arrives by e-mail just minutes before you are scheduled to turn in your ID. Questions may arise about confidentiality, non-disparagement, and non-compete clauses.
It is important to keep in mind that it is very common practice for employers to leave themselves with the flexibility to go after an employee for years after the employee leaves if the agreement is signed, whereas the employee getting work at a job similar to the job the employee has just left is often very much at the mercy of the employer’s continued willingness to pay out severance benefits. If you were laid off in a large layoff and your former employer is being acquired by another company, it is not uncommon for your new soon-to-be former employer to say "no thanks" to the severance benefits your old employer is offering .
This is where it may help to ask your attorney how other employees have fared with respect to the topic you are interested in. If you are with a good company known for treating its employees fairly and share the same interests, such as salary, benefits, and health insurance, as others who have gone before you, the information may be very useful. Where the information is not nearly so clear, its value may be much more questionable.
There are many reasons for wanting to sign an agreement, including being paid severance benefits, being able to start a new position without fear of a lawsuit, creating a clean break by moving on with your professional life, and avoiding public disclosure of what led to the need for the severance agreement. There are also many reasons not to sign an agreement, including concern the employer will retaliate against you by disclosing all or part of the agreement to others even though the agreement calls for all parties to dissolve into silence. Job references may be compromised by the agreement. The non-compete restrictions can be an admission that the employee is taking a job that too closely resembles the old one. And it often is not fun to read legalese for hours and realize that this employer wants to lock you into something indefinitely.
Often the actual written terms of the agreement matter less than the employer’s attitude toward you and your situation. If there is a hint of bad faith or dishonesty, the negotiation may be with respect to preserving dignity and valuing the employees who are departing but who helped the company succeed.
Common Mistakes
The most common mistakes made by employers are:
- Delay in presenting the severance and release agreement to the employee. Often times, employees are terminated and not immediately presented with a severance and release agreement. Usually the employee is told that it is on the way. Then, the agreement is not timely sent. The employee then finds other employment. The employer thereafter loses the complete ability to protect itself for post termination trigger events.
- Does the employer request some commitment from the employee in exchange for severance. For instance, if it is a key employee, does the employer require a nondisclosure agreement, noncompetition agreement, confidential information agreement or assignment of inventions agreement. If so, such terms should be enumerated in the severance and release agreement in advance.
- Does the employer require the employee to return its property. Often, the employee is required to return computers, blackberries, telephones or other equipment is not done. The agreement can require the turnover of such equipment.
- Does the employer try and have the severance and release agreement signed on the day of termination. This is extremely stressful for the employee and rarely does it make for a good business relationship. Give the employee three to seven days to review the severance and release agreement in order to consult with their attorney and have time to consider the employment status.
The most common mistakes made by employees are:
- Failure to consult with an attorney prior to executing the severance and release agreement. Many individuals have no experience in dealing with complex agreements. It is important to have someone with expertise in the area review the severance and release agreement before it is executed. Often times, an individual’s rights can be critical to a new position and can be lost forever. Money is often left on the table.
- Failure to ask for more than what is offered during the first conversation with the employer. Employers often times start with a low offer and then negotiate to an amount which could be significantly higher than the original offer made. Thus, if you do not ask and negotiate initially, you may receive substantially less than you are owed.
- Not understanding broad noncompetition agreements and how a noncompetition agreement operates. Employees need to understand the implications of each term to determine whether they are acceptable.
FAQs
Q: Are all severance payments subject to withholding?
For those severance payments for which the employer does not issue a Form W-2, they are paid to you and reported to the IRS on a Form 1099. So unless income tax is withheld for these payments, you will report this income on your personal income tax return (and pay the applicable income taxes when taxes are due).
Q: How do I know if my severance package was calculated correctly?
Many times a severance offer is calculated quickly and does not take into consideration a number of factors. These factors may be listed below.
Adjusting for All Paid Time Off (PTO) Days – Often severance packages are calculated with no adjustment for accrued but unused paid time off (e.g. vacation, paid time off, personal days, etc.) paid upon termination. Severance should be calculated to adjust for these amounts.
Salary and Benefits
Impact of New Employment – Severance agreements are normally negotiated, before they are signed. During this negotiation it’s important that you understand the "for cause" and non "for cause" termination provisions of your package. These terms are often limited to the severance payments being offered. Rarely are they a "full release" of liability to the employer. If the severance agreement’s terms allow, you may wish to seek new employment, especially if the severance package terminates upon re-employment .
Disability Insurance – Disability insurance benefits and how they interact with the severance arrangement should also be negotiated. If you anticipate needing long-term disability insurance benefits, your severance agreement may limit these benefits, or require reimbursement of the maximum amount of benefits paid out of the severance package.
Impact of Resignation – Most severance agreements provide for more restrictive severance benefits in the event of a resignation by the employee. Additionally, severance agreements provide for a greater severance package in the event of a termination without cause than with cause. Understanding the definitions and purpose of these categories are important to determine the most favorable outcome.
Q: Are all severance agreements enforceable?
Sometimes when a company terminates an employee, they ask the employee to sign a severance package. A severance package is simply a legal contract between the employee and the employer.
A severance package can be enforceable even if you decide to leave immediately after signing it. That is because the contract typically includes a release of any and all future claims against the employer. Even unlawful discrimination and retaliation claims that arise after the severance agreement is signed can be released. In exchange, the employer agrees to pay the employee what the severance package entitles them to.