December 5 Tip of the Week

“Severance Agreement Pitfalls”

When an employer decides to terminate an employee – a decision that we all know is not made lightly – the employer must decide whether they want to offer the terminating employee a severance agreement.  There are a number of reasons why an employer may choose to offer a departing employee severance benefits, including the desire to provide the employee a cushion to help them transition to a new position or because there are concerns that the employee may sue their former employer for discrimination or some other form of wrongful termination.  Defending against such claims can be expensive and employers may want to avoid the cost and uncertainty of such actions by offering a severance agreement that includes a release of claims.  The decision as to whether to offer such an agreement is, at its core, a business decision.  Once that decision is made, an employer must then be sure to offer the agreement in such a way as to ensure its validity.  What does this mean? 

First, an employer who offers an outgoing employee a severance agreement must do so in a measured and consistent fashion.  When offering employees a severance agreement with a release of claims, the employer must offer the employee new consideration  – essentially, something that the employee would not otherwise be entitled to if the agreement was not signed. 

Second, the employer must not overstep in the release portion of the agreement.  Not all claims can be released and employees cannot be prohibited from participating in investigations involving the employer.  If another employee sues the employer for wrongful termination and the employee is subpoenaed to testify in that action, the employer and the severance agreement cannot prevent the employee from complying with the subpoena.  Further, although the release of claims prevents the employee from receiving a financial benefit from a claim against the employer, the employee may still bring their complaint forward.  An example of this could be an EEOC charge of discrimination – the employee may still file the charge, but they cannot recover any money from that charge. 

Third, the laws vary from state to state regarding what can be included in a release of claims and any employee who chooses to utilize such an agreement must ensure that they are following the law of the state where the employee is located or the law of the state where the employer is located, whichever is better for the employee.  By ensuring that the agreement meets the most stringent requirements of the states involved, the employer will avoid having to defend against any claim that the agreement should be voided because it is against the public policy of either state. 

Logistically, there are additional concerns regarding severance agreements and releases of claims. Employees must be given a reasonable time in which to consider the agreement and the length of that time period varies.  At a minimum, an employee should be given an opportunity to consult with an attorney of their choice when weighing whether to sign the agreement or not – that means you should not present an employee with an agreement on a Friday afternoon and expect them to sign it by Monday morning.  If the employee is over the age of 40 and you are asking them to release any age related claims, federal law requires a 21 day consideration period.  While the employee may waive the consideration period, you cannot bank on that waiver. 

When to offer the employee the agreement in relationship to their termination date is also an important consideration.  If the intent is to allow the employee to continue to receive pay and benefits under the agreement without a break, then waiting too long to present the agreement to the employee will be an issue.  You cannot ignore the consideration period and, in addition to the time to consider the agreement, the law also requires employers to provide employees with a revocation period.  During the revocation period, which is typically seven days but could be longer, the employee may choose to “revoke” the agreement, which will render the agreement null and void. Any benefits or pay that was issued to the employee during that period cannot be clawed back if they revoke the agreement.  Therefore, it is important to not provide any of the benefits or pay contemplated in the agreement until after the revocation and consideration periods have expired. 

Severance agreements, when used properly, can be a useful tool for employers.  They can help the employer avoid liability in situations where an employee has a colorable claim of discrimination or wrongful termination and they can provide the employee with a soft landing when they lose their job.  Most employers do not want to fire employees, but often employees leave them with no choice – if the employee is unable to do the job for which they were hired, an employer needs to cut their losses and move on.  A severance agreement allows for that for both parties.  If you find yourself in the position where you need to let someone go and you want to offer them severance benefits, reach out to myHRcounsel.  We can assist you with drafting the agreement and in navigating the time frames involved.