One topic I get a lot of questions about is severance and separation agreements.
Generally, severance refers to giving an exiting employee a monetary bonus or settlement above and beyond their regular compensation. A separation agreement usually refers to an agreement wherein the exiting employee promises not to sue, file a regulatory agency complaint, take business or information with them, or compete with their former employer. In return, the employer gives the employee something of value (usually money).
So, a business could give an exiting employee severance without a severance or separation agreement, but usually doesn’t use a separation agreement without awarding some form of severance (i.e., consideration). If this is confusing, the below will hopefully clarify my point.
Recently, a client asked me about a separation agreement for an employee over the age of 40. This makes an interesting topic for a blog post (at least for a labor & employment law related blog 🙂 ).
Relative to dealing with an employee who’s 40 or older, if the employer is seeking a release of all claims pursuant to the Age Discrimination in Employment Act (ADEA), there’s a 21/7 rule that applies. Under the rule, which is actually contained in Section 201 of the Older Workers Benefit Protection Act, a release of claims under the ADEA is only valid if the employee’s release is “knowing and voluntary.” More specifically, in order to be “knowing and voluntary,” the exiting employee has 21 days to review the agreement, with or without legal counsel, and has an additional seven days in which to revoke their signature (beyond the initial 21 day review period). Other requirements may apply given certain considerations. In short, depending on the nature of the separation agreement, the 40 and older employee might have rights not afforded to younger employees.
Regardless of the exiting employee’s age, a separation or severance agreement that’s intended to release the employer from all known or unknown claims is essentially the employer’s purchase of the employee’s agreement not to sue or file a complaint with a government agency, not to take business or information to a competitor, or sometimes, to not even work for a competitor.
When I’m initially contacted about this type of employment agreement, I ask the client why they think they need such an agreement. More specifically, what are your goals/purposes: to reward an exiting employee for tenure and/or quality of service, to prevent a lawsuit or complaint from being filed, to protect the confidentiality of company secrets and information, to prevent an employee from competing with them, or a combination of the aforementioned?
Businesses often ask:
- Should we offer severance to an exiting employee?
- When should we offer it?
- How much should we offer?
- Are the terms negotiable?
- Should we ask an exiting employee to sign a separation agreement that includes noncompete and confidentiality clauses?
- What about protected class considerations (e.g., race, sex, age, disability, etc.)?
- What will my other employees or competitors think if they find out that an employee signed such an agreement or received severance?
In order to help the employer focus on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. In order to help focus the employer on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. If an employer believes that an employee will sue or complain to a regulatory agency, then a separation or separation agreement should be strongly considered. If a lawsuit, complaint or any other factors of the employee’s exit isn’t a concern, then a severance or even no action might be appropriate.
Keep in mind, that unless there’s a contract or agreement to the contrary, or obligations under the Worker Adjustment Retraining & Notification Act (WARN), severance isn’t necessarily required, and in many instances an employee can just leave.
Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.
One way of reaching a bottom line for these agreements is that an employer should not enter into an agreement with an employee, and have to engage an attorney, unless the employer is reasonably sure that they’ll obtain a benefit from the transaction that they wouldn’t get in the normal course of business. Ultimately, as with most business decisions, whether to utilize an agreement or not is a cost versus benefit analysis.
Consistent with my Disclaimer the above is a general discussion–i.e., every specific issue or case leads to its own specific resolution and should be handled accordingly.
Hi Chuck,
What a great look and even greater formatting of your wonderful content.
I will e updating my site to include your new address. Thank you for all the good work you do!
All the best,
Kathleen
Thanks for the comment Kathleen!
Regarding the provision in the agreement where the separated employee agrees not to sue his/her employer: Does this apply to potential future lawsuits for workplace hazards?
My employer is a chemical processor. The process involves three different acids, sodium and fluorides. There have been complaints among the employees about health issues due to spending long periods of time near these chemicals. If I sign a severance agreement where I agree not to sue my employer, does that include even lawsuits due to workplace health hazards?
I am an over 40 employee in Mass who was just released with one of these agreements. I do not really know if i was fired or layed off. I will find out when i get unemployement or not. I have not yet signed or returned the agreement or spoke with counsel. its been a week now. I may call someone in the next couple days
Can you handle the enforcement of a breached severance agreement? Please respond if you can, I’d like to discuss one.