Let’s start with the basics.
Employers seldom offer a Severance Agreement to employees who voluntarily resign: why entice or reward a good employee to leave the company? Moreover, critical terms in handbooks or other policy statements, such as confidentiality of company information, usually continue to apply to employees even after they separate from a company, leaving little or no reason for the company to enter a Severance Agreement with an employee leaving on his/her own volition.
Hence, in large part employers utilize Severance Agreements only with employees who are not voluntarily resigning (in other words, employees who are fired or laid off). To be clear, absent a contractual obligation, there is no law that requires a company to offer a Severance Agreement; whether one is offered is left entirely to the discretion of the employer.
So why would a company offer a Severance Agreement to an employee involuntarily separated? It is not a stretch to assume that fired employees are not happy about the decision, and thus there is a high risk that they will bring claims or lawsuits against the employer. Whether well founded or meritless, such disputes are costly and distracting. A Severance Agreement pursuant to which the employer pays for a release of all potential claims related to the former employee’s employment allows both parties to close the door on their issues and to focus on more productive activities than lawsuits.
What are the common provisions contained in a Severance Agreement?
A Severance Agreement will identify the parties – the employee by name, job title, and hiring and final date of employment; the employer by name usually listing all its associated companies (parents, subsidiaries), its board of directors, officers and agents. The notion behind including all possible entities/persons is that the intent of the Agreement is to settle all possible claims forever, and to close all possible doors to claims/lawsuits between the former employee and his/her employer.
In line with this goal of forever closing the door on future suits, a Severance Agreement will list possible claims being released, for example breach of contract claims, waiver of wrongful termination claims, waiver of claims for unpaid wages (including unpaid vested vacation pay), and waiver of tort claims. The list of possible claims is usually detailed and lengthy. Employees should be aware that employers cannot require the employee to waive his/her right to file charges of discrimination with the Equal Employment Opportunity Commission (EEOC) or parallel state agency. They can however require a waiver of a monetary award from any such charges.
Dollars are a third critical term. The Severance Agreement should detail the amount being paid; how it will be paid out (e.g., lump sum, in installments); any withholdings from the payment(s) (e.g., taxes); and the date(s) for and method of delivery of the severance payment(s). Separate and apart from a Severance Agreement, employees are entitled to be fully paid for all time worked and for any other vested monetary right (e.g., commissions, un-reimbursed company expenses, vested vacation banks). Any of these unpaid but due moneys should be stated in a Severance Agreement but because they are not payment for the employee’s wavier of claims the Severance Agreement must obligate the company to pay monies in addition to these due amounts for the Separation Agreement to be enforceable.
If the employee was enrolled in the company’s group health plan(s), a Severance Agreement likely will address continuance of coverage. Pursuant to federal law (COBRA), an employee and any dependents already enrolled in the group health plan (with a company that has 20 or more employees) can continue in the plan for up to 18 months after employment ends so long as the former employee pays the full premium each month. Though this is the law, for clarity sake it generally will be included in a Severance Agreement as well. In some cases and if the health plan allows, an employer may agree to cover the COBRA premiums for the former employee and, if so, this arrangement will be included in the Severance Agreement. Be aware that any amount an employer pays for health care premiums for a non-employee (which includes a former employee) is fully taxable to the employee as ordinary income (unlike premiums the employer paid while the employee was still employed at the company). The Severance Agreement should state whether any COBRA premiums the company pays will be paid monthly or as a lump sum. A common arrangement is that the employer will agree to cover the COBRA premiums for a set number of months or, if sooner, until the former employee becomes eligible to participate in another group plan (which could occur when the former employee is hired into another company offering group coverage or by enrolling as a dependent in a spouse’s group plan).
Severance Agreements usually include Confidentiality and/or Non-Disclosure provisions. As already mentioned above, many if not most employers have these same provisions in their handbooks or policies and make clear the constraints continue after employment ends. Nonetheless, in an effort to make all terms of post-employment as clear as possible, Severance Agreements generally reiterate the ongoing contractual nature of these commitments.
Severance Agreements involving higher level employees, sales persons of some products, and certain other categories of employees may include a Non-Compete provision, generally restricting the former employee from performing the same work for a competitor or him/herself within a geographic area and/or for a specific period of time. For example, a dentist in a practice may be precluded from opening an office across the street for some reasonable period of time (but the law disallows overly restrictive non-competes, for example by precluding the dentist from opening an office anywhere in Phoenix or from opening one across the street for a decade).
The number of other provisions that may be included in a Severance Agreement is too long to list, but here are a few of the more common ones:
- Non-Disparagement: Usually this bans each party from “bad mouthing” the other. As to the company, this generally bans the former employee from disparaging the company’s officers, its product, its employees, etc. As to the employee, it generally requires the company to agree to give a neutral reference.
- Post-Employment Cooperation: This provision is usually included only for management or employees with unique skills or information. It requires that the former employee, to the extent possible, make him/herself available if the company is involved in a legal action to which the former employee has information critical to the company’s case.
- Return of Company Property: This is another provision that likely only serves to remind the departing employee of commitments he/she already agreed to under a company handbook or company policies.
- Prevailing Law, Dispute Resolution: Generally, Severance Agreements identify which state’s law applies; the required venue (e.g. that a case/arbitration can only be brought in Maricopa County or Arizona state court); how disputes will be resolved (e.g. arbitration, in court (with or without jury)); and whether each party bears its own costs or whether the prevailing party’s costs will be paid by the losing party.
- Signing Deadline: The Agreement almost certainly will set a deadline for the employee to sign, warning that the offer expires after that deadline. Be aware that if the Severance Agreement requires you to waive age discrimination claims and you are 40 years old or older, the law requires you be advised in writing (the Severance Agreement or an attachment to it usually serves as that writing) to consult with your own attorney and that by law you have a minimum of 21 days to consider whether to sign the Severance Agreement (though you may voluntarily sign sooner) AND that after signing you have 7 days to revoke your agreement (the 7 day period cannot be shortened).
We are now back to the beginning: To sign or not to sign? In making that decision, consider the following (and all of the above):
- Were you terminated for an illegal reason? Was there discrimination involved? Sexual harassment? Did you report discrimination or other wrong act, and soon thereafter suffer discipline or termination?
- If you think you have a claim against the employer for discrimination, or any other legally enforceable claim, is the offered severance enough for you to walk away from those claims?
- Does the Severance Agreement impose more restrictions on you than you already have pursuant to company policies you agreed to be bound by (e.g., confidentiality, non-compete? If so, are you willing to assume expanded restrictions (or do you believe the expanded restrictions are unenforceable)?
- Are you satisfied with the terms of the Agreement, except that you believe the dollar amount (or continuing benefits) are far below what you should be paid for your ongoing commitments, including agreeing not to go after the company for claims you may have against it?
Keep in mind that the company (or its attorneys) prepared the Severance Agreement and of course then had its own interests at heart when doing so. Do not assume the Agreement offered to you is etched in stone; with some negotiations you may be able to reach terms more favorable to you. And don’t hesitate to get counsel involved as you move through this difficult process.
The lawyers at Faulkner Law Offices, PLLC have decades of experience helping clients in their transition out of a company, helping to assess claims and evaluate the valuation of a reasonable package.