Q: If an employer chooses to use a severance agreement when terminating the employment of a non-executive employee, what concerns should the employer keep in mind?
A: Severance Agreements can be an extremely useful tool to help ease the transition at the end of employment and limit the former employer's risk moving forward. Whether you run a small team or manage human resources for a large company, keeping in mind certain "building blocks" will help craft an unambiguous and enforceable agreement. Severance agreements are done for legitimate business reasons to reduce the potential of discrimination or other employment claims.
Building Block No. 1: Offer Consideration
Do offer extra pay or continuation of benefits to give
"consideration" in exchange for a release of claims
included in the Severance Agreement. Additionally, include
instructions for the departing employee to follow regarding any
benefits they may be entitled to at the end of their
employment.
Don't try to include unpaid wages, owed
bonuses, or personal time off pay as part of the severance package.
Several states and federal law require the employer to pay out
accrued/vested bonuses and PTO at the end of employment.
Building Block No. 2: Reduce Risk
Do implement beneficial clauses, including but not limited
to release of claims and a return of company property
provision.
Don't make your non-disparagement and
confidentiality clauses overly broad. Non-defamation clauses should
be narrowly tailored, justified, and limited to defamatory
statements about the employer. Confidentiality clauses should be
limited to the terms of the settlement agreement, permit disclosure
to attorneys or tax professionals for advice or in response to a
lawful court order and governmental agencies for investigations,
with a specific reference to the National Labor Relations Board.
Additionally, do not include a provision releasing any of the
departing employee's claims that cannot be released.
Building Block No. 3: Follow the Law
Do check to see if various state and federal laws apply,
such as the Older Workers Benefits Protection Act for employees
over the age of 40.
Don't take a "one-size-fits-all"
approach to your Severance Agreements. It is important to check
your specific jurisdiction to determine what employment laws and
protections may be required in your state, as well as under federal
law. Do not assume the same protections apply equally for all
individuals, regardless of location.
Building Block No. 4: Consider an Arbitration
Agreement
Do consider carefully whether to include an arbitration
agreement within the Severance Agreement.
Don't include a unilateral arbitration clause.
States have varying requirements with respect to the use of
arbitration agreements in employment dispute settings. Some states
require that the arbitration clause be mutual. Further, some
employment claims, such as sexual harassment claims under Title
VII, cannot be arbitrated.
Building Block No. 5: Stay Consistent with Previous
Agreements
Do check to see if there are any other applicable
contracts, nondisclosure provisions, or noncompete clauses
applicable to the departing employee. Severance Agreements should
be consistent with all employment policies and practices by the
employer
Don't prepare a Severance Agreement
inconsistent with previously signed agreements.
Building Block No. 6: Protect Yourself Down the
Line
Do include provisions to protect your company from
the potential impacts of the Severance Agreement, such as tax
consequences, choice of law, severability, and enforcement of the
agreement. Additionally, consider provisions governing the
company's relationship with the departing employee moving
forward if permitted in your jurisdiction, such as a
"no-rehire" provision or a "neutral review"
provision.
Don't ignore these provisions because they
increase the length of the agreement.
While every Severance Agreement requires a case-by-case analysis to evaluate and determine what specific state and federal laws will be applicable to the departing employee under the circumstances, when taken together these building blocks help form a solid foundation for any Severance Agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
