February 27 Tip of the Week

“Are Severance Agreements Worth It?”

The decision to terminate an employee is never an easy one for a variety of reasons.  First, employers invest a lot of time and money in recruiting, hiring, and training employees.  Second, in today’s economy with its move to remote working arrangements, quiet quitting, and other anomalies brought about by the pandemic, it is difficult to find pools of qualified and motivated applicants for open positions.  Finally, employees have many methods in which to challenge a termination decision – wrongful termination claims abound and can be filed using the established procedures of state and federal agencies that are largely designed to protect employees and to ensure that employers provide “equal opportunity” in employment.  These agencies often act as an arbiter of whether an employer treated an employee properly, even in states where the employment relationship is “at will” meaning an employer or an employee can terminate the relationship at any time, for any reason or for no reason at all.  The big caveat is that an employer cannot terminate an employee in an at will employment relationship for an unlawful reason.  Given the patchwork of state, federal, and local laws that govern the employment relationship, terminated employees often have the ability to file a claim or a charge against an employer challenging their termination under one of those laws. 

To protect themselves against such claims, employers often resort to the use of severance or separation agreements that provide the terminated employee with a monetary benefit, such as continued pay or benefits for a period of time, in return for a release of the employee’s claims or potential claims against an employer.  In theory, these agreements are a useful tool for employers in that they limit the employer’s liability in an employment termination situation to the amount of the severance offered as opposed to the open-ended liability that can result from an employee’s successful wrongful termination claim.  When using these agreements, employers often include nondisclosure clauses and anti-disparagement language to control what departing employees are able to share about their departure and what they are able to say about their former employer.  For employers who are particularly sensitive to public opinion or who may be faced with a series of terminations where some employees will receive severance and others will not, these clauses are essential for the employer to receive the benefit of their bargain – the employee’s silence in return for the payment of severance. 

A recent National Labor Relations Board opinion has stated that the inclusion of these two clauses in a separation or severance agreement violates an individual’s right to engage in collective action with regard to their terms and conditions of employment.  The practical application of this decision is that employers can no longer include confidentiality provisions in severance agreements, as employees have the right under the National Labor Relations Act to discuss the terms and conditions of their employment, including any termination benefits they receive.  Sharing the existence of a severance agreement lies at the heart of what the Act was intended to do – allow workers to band together to engage in collective activity and support each other in their employment relationships and to reach out to the union to obtain assistance in negotiating their terms and conditions of employment, including their separation from employment. 

The Board has also determined that no disparagement provisions are also unlawful, as one of the primary means of collective action is sharing information about an employer, former or current, negative or positive.  The Board has held that employees, including former employees, have the right under the act to discuss labor issues, disputes with employers, and the terms and conditions of their employment.  This protection is available to employees and former employees in most instances; the only exception would be if the employee acted in a reckless, malicious, or deceitful manner in making statements about an employer. 

What does this mean for employers?  Severance agreements may not have the same value to an employer as they once did if the employer cannot include confidentiality or no disparagement provisions in those documents.  Employers should review the circumstances of each employee’s termination carefully to determine whether the investment in the severance benefits provides sufficient value in terms of the limitation on liability.  For employers who are terminating employees with clear cause – and have the documentation necessary to establish just cause– a severance agreement may not be necessary to protect the employer from future claims.  Severance agreements may also no longer be appropriate for those employees who are vocal and like to share their circumstances with others.  A severance agreement will not be able to be used to prevent them from oversharing and, therefore, may not be an appropriate tool for the employer who is seeking to contain such an employee. 

At myHRcounsel, we can assist you in navigating employee terminations and the question of when a severance or separation agreement makes sense and when it may not be appropriate.  We can also provide you with legally compliant separation agreements for employees in all 50 states.