Whether it is rain or shine in the economy, people are leaving jobs and starting new careers, businesses, or simply retiring from employment at much greater rates than in the past. Severance agreements with employers have become an area of law that has seen a large increase in litigation over the past decade. This is why whether you are an employee or an employer, a properly written and negotiated severance agreement is a hallmark to protecting yourself from future litigation costs and putting some money in your own pocket..

In this article, I highlight five items that I believe all people negotiating a severance agreement, whether they are an employee or an employer, should take a keen interest in.

1. What is the amount of severance pay and what are its terms?

This is really the topic that is on everyone’s mind when negotiating a termination from employment. What am I going to be paid? What will I have to pay the employee?

There are times where employers have set policies pertaining to severance. As an example, an employer may set their severance as one week of pay for each year of service. There is some intelligence in this because it avoids drawn out negotiations and could also avoid discrimination claims later. However, a one side fits all mentality is often not the best way to run employment and Human Resources matters.

If an employer does not have set policy on calculation of severance, negotiation of severance pay terms is vitally important. Employees and employers should consider some of the following:

• Will the pay proposal be negotiable or set in stone? If the employer refuses to move on total severance pay, maybe the employee can get a higher payout based on offering a longer non-compete term. More on non-compete later in this article.
• What are the terms of the payment? Will it be a one-time payout? Payable over time? If it is payable over time is the severance payment only to the employee personally or will it survive the employee’s death and be made to the employee’s estate or heirs?
• What about unused vacation and sick pay? Will the employee receive payment for unused vacation and sick time or is the severance payout inclusive of all amounts?
• What if the employee quickly obtains new employment, is the severance pay contingent on the employee remaining out of work?

2. What about healthcare benefits?

It is no secret that costs of healthcare continue to outpace all other major costs in the U.S. economy. Couple this with the fact that the majority of Americans receive their healthcare from their employer and you can see why negotiation of health benefits upon termination of employment is an important concern in the negotiation of a severance agreement.

In 1985, Congress attempted to address the concern of people losing their health coverage when they lost their employment. In that year Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA). Pursuant to this law, a terminated employee can continue their healthcare coverage under their prior employer’s plan for up to eighteen (18) months after the end of their employment. Under the law, the employee is responsible for paying the full premium of that coverage.

As part of negotiation of severance agreement, employees and employers can negotiate over employer-aid healthcare coverage after termination. In fact, I believe this is much more common today than it has been in the past. It is important for the employee and the employer to know that if the employer pays healthcare premiums for the employee after termination or provides an additional amount of money in a lump sum on termination for the purchase of continued healthcare coverage, that amount is more likely than not income for the employee and is likely taxable. That is a question for an accountant not a lawyer like me.

3. Will There be a Non-Compete Clause in the Severance Agreement?

An employer may legitimately be concerned that a former employee will leave upon severing employment and attempt to take clients or portions of a business when they leave or go into direct competition with the former employer. To prevent this from occurring, an employer may legitimately seek to enter into a non-compete agreement with the employee as part of a severance package.

These agreements are a matter of state law and each state has specific laws on their enforcement and the breadth that such agreements can have in temporal and geographic scope. In addition, some employers have used these agreements in extremely oppressive ways against low wage workers, which has led to states limiting their use based on industry or employee earnings. 

I am licensed to practice law in Nevada, Washington and Oregon. I spend most of my time working in Nevada and have written a blog post available here for some Nevada specific information on non-compete agreements. If you live in another state, sorry but I don’t have a blog post for you.

4. Employment Reference and Non-Disparagement

These two could likely be separate issues onto themselves in this list. But, I promised you five things to look out for, and if I gave you six things, that would be odd. I think they are best addressed together because one involved employee concerns of what the employer will say about them in the future and the other involved what the employee may say about the employer in the future.

The employer wants to ensure the employee does not run down its reputation, which could be costly for its relationship with current and prospective clients or employees. The employee wants to be sure that the employer is providing at the very least a neutral reference that includes the dates of employment. An employee may want to negotiate for more including a reference letter stating the employee performed his or her tasks well for the employer.

The breadth of non-disparagement and employment references is often not capable of a precise give and take. The contours of these clauses will be different in every agreement.

5. Releases of Liability

After negotiating an employment severance agreement, the last thing an employee or employer wants is to be engaged later on in a court case with their former employer or employee. This is why every severance agreement that I have ever seen contains a release of liability and legal claims and causes of action.

The releases in severance agreements will usually contain enumerated statutes under which claims could be brought but for which the employee waives all such claims. A common set of statutes named in these agreements include disability discrimination (ADA), sex, race, gender, religious, and national origin discrimination (Title VII), age discrimination (ADEA), and FMLA. It is also important to name any state law equivalents of federal statutes because failing to name them in a release of claims could lead to litigation.

Another set of legal claims that sometimes are waived within these releases are wrongful termination based on public policy, which is a state common law claim. I have also seen agreements that waive claims under Section 510 of ERISA. It is easy to see that from the employer’s standpoint, they want to have no liability to the former employee after the severance agreement is signed. The employee may wish to protect some of these claims from being lost, but doing so will often make negotiation of a severance agreement impossible.

One not on the waiver of age discrimination claims and that is if an employee is older than forty (40), the employer must give the employee twenty-one (21) days to consider the severance agreement and the agreement must also provide the employee with seven (7) days in which she can revoke her agreement after signing the severance agreement. Another word of caution, depending upon specific state laws, come claims cannot be waived by an employee.

An employee may also seek a release of liability or at least some sort of indemnity from the employer for claims that arise against the employee following the end of his or her employment. This is particularly true where the employee could have personal legal liability for actions undertaken as a company representative.

Takeaway

The only way to fully understand and appreciate the legal ramifications of a severance agreement and its negotiation is by retaining a labor and employment attorney practicing in your state. This article is not legal advice and should not be used as such. This article is only meant to provide legal information and does not constitute the formation of an attorney-client relationship with the article’s author.

An original version of this article with additional Nevada specific information was published here: https://nevadalaborlawblog.com/2019/04/11/five-things-to-review-in-every-severance-agreement/

Do you think I have missed something that should be in the top 5? Do you have some additions to make this a list of ten? Drop a comment and let me know.