When Should You Offer a Severance Agreement?

By Mary E. Buckley

Parting Is Ever Such Sweet Sorrow…

Parting ways with an employee can genuinely cause a certain kind of sorrow and pain for employers if the terminated employee decides to sue. A severance agreement can avoid litigation, leading both employer and employee to a smooth exit and new beginning. For a severance agreement to achieve such, it must be drafted properly and tailored to the facts and circumstances of each termination.

I. What Is A Severance Agreement?

A severance agreement is any contract that is entered into between an employer and a departing employee that compensates the employee for leaving that employment position. A severance agreement is not required in order to terminate an “at will” employee as those employees can resign or be terminated at any time. Absent an employment contract, an employer generally does not have an obligation to pay the departing employee severance or offer a severance agreement. In addition, the departing employee is not required to sign the severance agreement.

However, even though it may not be required by contract, an employer may wish to seek a severance agreement, which provides some type of compensation to the departing individual in exchange for that individual abiding by the employer’s limitations on his or her post-employment conduct and/or waiving the right to sue on certain grounds. The aspects of post-employment control and avoidance of litigation are the main reasons an employer would want to use a severance agreement.

II. To Use, Or Not To Use: That Is The Question?

A severance agreement is not appropriate for all employees. The employer needs to look at the employee’s duties and responsibilities as well as the circumstances surrounding the termination.

Is the individual in a protected category under a discrimination law? What is the likelihood this person will be replaced by someone not in a protected category? Has the employee recently engaged in protected activity, such as taking leave under the Family and Medical Leave Act (FMLA), filed a workers’ compensation claim, complained of sexual harassment, requested an accommodation, or acted as a whistle blower against her employer? As an employer it is important to be aware of these things before terminating someone because if these factors are present, terminating the employee without offering a severance agreement could be costly.

For situations with those complicated factors involved, the employer should consider paying for the peace of mind in avoiding ligation which could arise because the employer terminated the employment relationship. If the situation does present with any of those risk factors above, then a severance agreement should be utilized. This is not as simple as it sounds because the Equal Employment Opportunity Commission (EEOC) has laid out very specific language that can be used, should be used, should not be strayed from, and which will be discussed below.

Other than those certain risk factors mentioned above, there is another reason or circumstance when an employer would want to use a severance agreement – to ensure post-employment control.

Post-employment control occurs with certain common provisions which often are included in severance agreements. The most common limitations on post-employment conduct are non-compete, non-solicitation, confidentiality, disparagement, and no-hire provisions. With these, the employer is buying the right to exercise some level of control over the departing employee’s conduct. Some things to consider include: Is what this employee knows, or her job duties and knowledge such that it will be worthwhile to pay for post-employment control? Does this employee know trade secrets, client lists, marketing strategies, or any other information that gives someone the edge over a competitor?

If the answer to any of the above questions is in the affirmative, then paying to get post-employment control through a severance agreement should be utilized. With an executed agreement, the employer has gained some control over the post-employment conduct of the terminated individual regarding such issues. An employer should consider using it with any employee that legitimately has or could have information or knowledge that could be taken elsewhere and used to cause or increase the competition against the former employer.

The severance agreement for Chad in the mailroom will be different than for Mike the C.E.O. A severance agreement is not “one size fits all” and should be specifically tailored to the situation at hand.

If drafted properly, the relationship can be considered to be completely and forever severed, with each party moving on in the world, never again to have to deal with each other; and that is the goal.

III. Beware The Ides Of March!

There are several things to be aware of when it comes to using a severance agreement. As stated above, the EEOC has very specific language that it requires for a waiver or release to be considered enforceable and not “overly broad and misleading.” Employee release agreements are struck down as unenforceable by courts when the agreements are not well-drafted. Provisions like non-compete, non-disparagement, or confidentiality, can result in an unenforceable agreement if they are overly broad or infringe on an employee’s right to file or otherwise institute a charge of discrimination, to participate in a proceeding with any appropriate federal or state government agency enforcing discrimination or other employment laws, or to cooperate with any such agency in an investigation. Even worse than being unenforceable it can result in liability on behalf of the employer for violating the law in that agreement and any past agreements that used the same language. For example, liability can result if an agreement amounts to denying employees the ability to fully exercise their Title VII rights by limiting their ability to file charges and cooperate in an investigation. Although, a properly drafted severance agreement can limit the employee’s ability to recover damages for any discrimination charge. Because such language needs to be carefully drafted, these agreements should not be pulled off the internet or drafted last minute – to do so could be a disaster.

In addition to those above, there are special requirements, including timing provisions, for people age forty and over that must be followed to the letter. For those employees forty years and over, the Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Plan (OWBP) create a Federal minimum amount of time (twenty-one days) that an employee age forty or older must be given when considering a severance agreement. In addition, it also provides for a seven-day window after execution within which the individual can revoke the agreement. There is an extended time requirement (forty-five days) if the employer terminated a group of employees age forty and over. Timing is not the only special provision required for those forty and older. Another provision required for enforcement is that the language be understandable in plain, clear language that avoids complex sentences and legal jargon, such that the person is likely to understand what rights are being waived. There also must be a specific reference to the ADEA or the agreement will not be enforceable. It must advise the employee to consult an attorney. It must not misinform or mislead in any way, nor may it exaggerate the benefits being offered or limitations imposed. It must be in writing and it cannot waive claims that arise after it is signed.

For those workers under forty, there is no statutory minimum amount of time required, but if time is not of the essence, then the employer should consider giving the terminated employee more than a weekend to sign the agreement. Again, severance agreements are not a one size fits all type of contract and must be tailored to the employee being terminated.

Aside from the legal aspects in and of the agreement itself, there is a personal aspect to consider. These agreements are dealing with people and emotions. Handing over a five-page, single-spaced severance agreement to Chad in the mailroom will cause an emotional reaction. The person has just gotten fired. Whether he or she knew it was coming or not, emotions and feelings are involved which an employer should not overlook.

IV. This Is The Short And Long Of It.

Severance agreements generally can, and usually will, save an employer time and money. A lawsuit by your receptionist can be just as expensive as a lawsuit by the CEO, in terms of defense costs and disruption. Federal law regarding these types of agreements is constantly changing and severance agreements should be updated regularly to make sure those agreements will be enforceable.

Updating regularly does not mean pulling the latest version from the internet or reading a couple articles on severance agreements. Updating regularly means consulting an attorney and paying the cost to get an agreement that will hold up and save you more cost, time, and frustration down the road. However, even the best drafted severance agreement will not stop an employee determined to sue from suing, but with a properly drafted agreement the situation will not be that of a Shakespeare tragedy.

Mary E. Buckley, Associate Cross, Gunter, Witherspoon & Galchus mbuckley@cgwg.com www.cgwg.com

Mary E. Buckley, Associate
Cross, Gunter, Witherspoon & Galchus