Severance Agreement Defined
Severance Agreements are contracts between the employer and the employee. The agreement will generally lay out the amount of money (and perhaps additional benefits) that the employer will provide to the employee in exchange for certain promises from the employee. Sometimes the agreement is part of a larger employment agreement that covers more than just severance pay (such as in an executive employment agreement). However , severance agreements are often separate documents that come into play when there is a lay-off or other separation of employment. Often these agreements call for the employee to release the employer from any potential claims that he or she may have. In exchange, the employer will provide the payment and benefits laid out in the agreement. A written severance agreement is always better than nothing, and could be a useful negotiation tool to leverage more severance.
The Importance of a Severance Agreement Attorney
It’s true that, at the end of the day, some employers will not budge on their initial severance agreements, but without the negotiation power and in-depth knowledge of an experienced attorney, your employer has the ability to gain much more than it deserves in a severance agreement and you will end up paying a high price when you sign your rights away.
Many severance agreements include non-compete and/or non-solicitation provisions that prohibit former employees from working for certain competitors for a specified period of time. Often times they also come with confidentiality and non-disclosure requirements that can make working in the same industry or similar position difficult immediately after the separation. Without legal representation, employers may be well within their rights to completely disenfranchise employees from finding meaningful work, mistakingly believing it is within their rights to do so under the law or simply hoping the employee does not question the terms of the agreement.
Without an attorney, you may be forced to take the terms of the severance agreement, which typically include a general waiver of liability for any claim that may arise from the employment relationship, when a skillfully negotiated severance agreement would provide the individual with some recourse for terminating employment.
Additionally, a lot of severance agreements require employees to agree not to criticize or disparage the company at all after termination. This provision can be used by a company to prevent an former employee from discussing payment and terms surrounding the severance agreement as well. The provision can be written to not include incidental comments and/or can be negotiated to allow the employee to share the terms with family members and attorneys, but businesses typically use these clauses to subtract the value of the severance from the bottom line.
On top of all of this, if you do not have a clear understanding of the severance agreement and are not familiar with the employment laws that apply to your situation, you can be one signature away from ruining future employment prospects and losing money over the long run.
Key Components of a Severance Agreement
Many severance agreements will range from one to several pages in length and many companies have their own form or customization of these agreements. Among the key elements that are commonly included are a confidentiality clause, non-compete covenant and the amount of compensation, whether in monetary terms or otherwise.
A confidentiality clause is often included in a severance agreement as a way of protecting the company’s sensitive information and to prevent the employee from sharing any proprietary information learned during the course of business while employed with the company. The clause will typically state the employee acknowledges that they have at all times held in the strictest confidence certain information about the company, and agrees to protect this information from any disclosure in perpetuity.
The non-compete clause is also commonly included in a severance agreement to prevent the employee from using any company contacts or knowledge obtained while employee and under contract for self-gain or competing against the company. A non-compete is typically only effective within a specified time frame and within certain geographic limitations.
The amount of compensation is another common provision of a severance agreement. Severance can vary greatly from one company to another. These are usually lump sum payments or payments over a specified time period which may be tied to a specific formula or amount of the employee’s base salary. Many agreements require a release of claims under federal, state and local law, including claims arising from the Age Discrimination in Employment Act, to be accompanied with a waiver period and an opportunity to revoke the agreement. An employee who is age 40 or older must be given an opportunity to consider the terms and conditions of the severance agreement for 21 days after it is provided for signature by the employee, and then must sign the agreement within seven days. An employee has seven days after signing the agreement, to revoke the release. An employer cannot make any payments or provide any benefits to an employee until the time for revocation has expired.
Selecting the Best Severance Agreement Attorney
When you are looking for an attorney to help you understand or negotiate a severance agreement, there are a number of factors you should consider. First, you want an attorney who has specialized experience handling severance agreements for employees. You want an attorney who knows the ins and outs of employment law, and can provide you with advice tailored specifically to your needs. In particular, you should make sure that your attorney has experience helping employees negotiate severance agreements, not just employers. Many attorneys may say they handle employment law on their website, but be wary of attorneys who practice several different areas of law, including estate planning and family law. An attorney who handles a broad range of legal issues will not have the same level of expertise as one who focuses exclusively on employment law, and in particular severance agreements. You also want an attorney that you feel comfortable asking questions of, and feel confident in their abilities to explain things to you. For a matter as potentially complex and impactful as a severance agreement, you should find someone who understands the intricacies of employment law and can explain your options to you clearly. Lastly, not all attorneys will charge you when you first meet with them, or will charge you a flat fee for reviewing a severance agreement and providing you with some recommendations. At Shavitz & Bruce, we have a free initial consultation with clients and will review your severance agreement at our cost, allowing you to determine if we are the right fit for you.
Negotiating a Severance Agreement: Steps to Follow
- . The attorney assesses the situation and tells the employee from the get go whether or not he or she agrees that the severance agreement on offer is fair. Some employment lawyers will tell the employee that they should not even bother having the attorney get involved. I disagree with this. An employment lawyer knows the legal issues involved, and can advise as to whether the termination was perhaps in breach of the Employment Agreement or the Employment Standards Act, for example.
- . If the attorney agrees to represent the employee, then the lawyer will either ask for a greater amount, or will seek additional items, such as an extension of medical/dental/vision benefits, outplacement services, an increase in the non-competition/non-solicitation period, and/or the non-disparagement language . The employer’s attorney will respond. The parties will go back and forth at least one or more times.
- . If no settlement can be reached through negotiation, then there is the option of litigation. The employer and employee will engage in "discovery", which is the process whereby, among other things, a party (the "moving party") can ask the other to produce documents and information which the moving party believes might be useful in proving or defending the claim. The parties will also attend a "case management conference" with a judge or case manager. There are often a series of case conferences before trial. If there is still no settlement reached by the end of that process, the case will go to trial. All of this takes place outside the Severance Agreement.
Avoiding Pitfalls in Severance Negotiations
Employees often rush into negotiations with their employers without fully knowing their own rights. In this economy, where jobs are difficult to come by, people are also willing to accept less than they deserve to "seal the deal" with an employer. Both are huge mistakes. While the average severance is six months of pay plus benefits, the amount of severance you are offered by your employer often depends on several factors:
Without the assistance of an attorney, employees commonly leave money on the table with employers who know all the facts and have done this many times before. Does a severance agreement require the employee to continue working for a while after termination? If so, should this be paid at the employee’s severance rate, or does that time fall into the duties of an at-will employee? Certainly, an employee should prefer to do no further work or cut back on his or her work until the employer has provided a good reference. Should employees sign up for a non-compete agreement at the same time they are negotiating a severance? Do I know enough about the company to agree not to compete, when I am hardly a strategic planner? A common mistake is to assume a severance contract is valid once signed. Many people believe all contracts are valid if signed. But there are several circumstances in which a signature may not be binding. One example is where an employee was promised something outside of the written contract but vague language prevents that promise from being enforceable. Another example is where the agreement is unclear. Contract remedies may be more than just monetary. A good attorney negotiates for what is best for the employee, whether that is a hefty severance package, time off or the continuation of health insurance. Your attorney knows when it is better to give the employer what it wants and get something in return that is more valuable to you. Does the employer fail to offer anything for success in finding a new job? Your attorney reminds you that you had success in your past job and that is your greatest asset in returning to work. You deserve outplacement services from the employer, especially if you are encouraged to use the employer’s company against competitors. It is impossible to over-emphasize the dangers of signing a severance contract prematurely until you have considered all the issues. As in most contracts, a party must give something of value in exchange for the promises made. Your attorney will consider what you are giving up and whether the employer is giving you sufficient value in return. A severance agreement attorney should help you completely understand the deal you have been offered, explain all of the ways you can increase the value to you of the deal, and then review the final agreement to be sure you got what you wanted and understood what you were signing.
Success Stories: When Legal Help Pays Off
It’s always wise to have legal counsel review your severance agreement, as demonstrated by the following hypothetical examples:
An employee in their early 60s is offered a severance package of one week of pay for each year of service with the company, for 15 years of service. Although the severance offer is considerably below what the employee had anticipated, the employee reluctantly accepts the severance offer. Upon review of the severance agreement, however, the employee’s attorney determines that not only had the employee not yet reached full retirement age at only 60 years old, but also that State law and the employer’s employee handbook both provided the former employee with a much earlier retirement date.
The employee’s attorney was therefore able to renegotiate the severance at a significantly higher level than the performance of the calculations within the severance agreement (which the employee had been prepared to accept).
An employee unknowingly signed a severance agreement with a release of all claims in favor of the employer in retaliation for reporting sexual harassment, thinking that such an agreement was a means to obtain a paycheck while looking for a new job.
When the employee’s attorney reviewed the severance agreement, he determined that the agreement contained age-based discrimination language (i.e. waiving all claims under the Age Discrimination in Employment Act) and therefore that the confidentiality provisions of the severance agreement were unenforceable because they violated the public policy of protecting employees from age discrimination .
At the demand of the employee’s attorney, the severance agreement was amended to revise the applicable age-based discrimination language and clarified that the confidentiality provisions were only to be applied to non-public information of the company, and therefore did not cover any allegations of discrimination, harassment, and/or retaliation.
An employee working as a recruiter for a staffing agency called our firm after receiving his severance agreement after his employment was terminated when his placement level unexpectedly dropped. The recruiter was pleased with the severance agreement, which provided him with one week for each year with the staffing agency. However, the recruiter was unhappy with the termination itself.
When the recruiter’s attorney reviewed the severance agreement, the attorney determined that the recruiter had a significant number of placements that resulted in incentivized pay. Depending on the level and specificity of the incentive plans and the timing of the recruiter’s placements, the recruiter was entitled to additional periods of pay and amounts substantially more than the severance agreement provided.
The severance agreement attorney was able to renegotiate the amounts paid, as well as provide provisions within the severance agreement allowing the recruiter to collect the additional amounts to which he was otherwise entitled.
