Key Considerations for Severance Agreements
Employees facing an unwanted termination of employment will often be presented with a severance package which includes monetary compensation and a release of claims. Acceptance of the monetary compensation requires the employee to give up certain rights and absolve the employer from liability relating to actual or potential claims arising within the employment relationship. Severance agreements are written in favor of employers, so it is always wise to consult with an attorney before signing any waiver of rights. Things that your attorney will consider with you may include the following:
- Does the agreement include an offer of something of value to the employee in exchange for the release?
It is not enough for an employer to condition a waiver of rights on simply paying out vacation benefits or previously earned retirement funds. Some other value must be included such as a monetary payment of the employee’s salary for a specified period of time. Typically, the longer an employee has worked for an employer, the greater amount the severance payment should be. The monetary payment must also be reasonable in comparison to the claims being released by the employee. The agreement should clearly state how the compensation will be taxed, and if the employee will be required to offset the compensation in the event they are provided unemployment benefits. An employer may also be willing to agree to pay the premium for health insurance under COBRA for a specific period of time. The severance compensation should comply with any promises made by the employer in the employment contract or policy handbook.
- What claims does the agreement require the employee to waive?
For example, if the employee is over 40 years old certain requirements must be met in the severance agreement to allow the employee to voluntarily waive claims for age discrimination. The employee must also be allowed a certain period of time to consider signing the waiver, and a period of time to revoke the waiver after it is signed. Some claims cannot be waived in a severance agreement. The nature of any potential claims an employee has against an employer should be considered carefully before a severance agreement is signed.
- Is the agreement mutual?
If the employment relationship ended as a result of misconduct, the employee will likely want to be sure that the employer also waives any claims against the employee that could be brought in the future.
- Is the agreement confidential?
Is the employee allowed to talk with other employees about the terms of the agreement? Will the employer give the employee a reference to new prospective employers? In the event another employee has a claim against the employer in the future, will the employee be permitted to provide information or assistance? This is also a good time to consider the impact of any non-compete, non-solicitation, or other confidentiality clauses that were previously agreed to at the commencement of the employment relationship. Employers may want to consider having the employee re-affirm their understanding of the contracts the employee signed at the outset of employment.
- How will unemployment claims be handled?
The employee and the employer may consider including a clause in the severance agreement confirming the statements both parties will make to the Department of Employment Security. Both employee and employer should be aware that the decision regarding whether unemployment benefits will be awarded is made by the Department of Employment Security and can only be influenced by statements made by employees and employers.
- Does the agreement provide for return of employer’s property?
The agreement should specify the manner and time frame of return of the employer’s property and, conversely, the agreement should confirm that the employee has had an opportunity to remove all the employee’s property from the work site.
- How will the separation of the employee from employment be described to third parties?
The employee and the employer should address what statements will be made to prospective employers of the employee when contacts are made to the employer. For example, is the employee eligible for rehire? Will the disclosure be limited to dates of employment and job title held? Who, at the employer’s office, will be designated to handle inquiries?
- How will post employment disputes be handled?
The severance agreement should only operate to waive claims arising during the employment relationship. However, during the negotiations over terms of the agreement, the parties should consider addressing the impact and potential terms of resolutions of any future disputes.
Employers must follow federal, state, and local laws with regard to severance agreements to ensure that employee’s rights are not violated. It is always a good idea to have an attorney review a severance agreement before it is executed. If we can be of assistance in conducting such a review, please contact us.