off therecord

2018

2017

2016

2015

2014

2013

2012

2011

2010

May 07, 2018

Severance Agreements

By: Allison Mann

Terminating an employee is not a pleasant task and is a high-risk endeavor for an employer. A terminated employee oftentimes feels mistreated by their former employer. Disgruntled employees are likely to air their grievances, whether substantiated or not. One tool in the human resource professional’s toolbox is the severance agreement. If utilized correctly, it can reduce the risk of complaints and lawsuits filed by former employees. However, severance agreements also have their limitations.

A severance agreement is any contract entered into between a departing employee and their employer, whereby the employee is compensated for leaving the position. This is a payment that an employee is not entitled to receive. In exchange for the payment, the employee generally agrees to waive certain claims against the employer, or agrees to certain confidentiality terms. Then, if the employee does bring a lawsuit against the employer on a claim it has released, a court will dismiss the claims without any further litigation.

An employee can waive many potential claims against an employer, including but not limited to contract claims, tort claims, workers compensation, and claims of discrimination, retaliation, and defamation. The intention of a severance agreement is to ensure that the employee cannot claim that the employer is in any way obligated to pay any damages, expenses, or interest to the employee.

However, there are laws, rules, and regulations that govern how and when an employer may use a severance agreement.

First, the employer should consider whether a severance agreement is appropriate to use in a certain situation. Considerations may include the likelihood of a specific employee actually signing the agreement, the amount that the employer would have to pay to induce the employee to sign, and any other company policy or procedure that may affect the decision. A severance agreement may not be the solution in all circumstances.

Next, there is the risk that a court may determine that a severance agreement is not valid. A threshold determination of validity of a severance agreement is whether the employee signed it knowingly and voluntarily. This is a fact determination, where the totality of the circumstances surrounding the execution of the agreement will be considered. Specific laws may also have factors that a court must consider when making a voluntariness consideration. One example is the Age Discrimination in Employment Act (ADEA). There are seven factors that must be shown before a severance agreement can effectively waive claims under the ADEA, including:

    • The waiver must be written in a manner that can be clearly understood;
    • The waiver must specifically refer to the ADEA;
    • The waiver must advise the employee to consult with an attorney;
    • The waiver must provide the employee with 21 days to consider the offer;
    • The waiver must give the employee 7 days to revoke their signature;
    • The waiver must not waive future rights or claims; and
    • The waiver must be supported by consideration additional to what the employee is already entitled.
This is just one example. Other state or federal laws may have more specific requirements.

Finally, the human resource professional must be aware that severance agreements cannot universally absolve an employer from certain types of liability, and it cannot restrict an employee from exercising certain rights. For example, certain claims under the Fair Labor Standards Act can only be waived in very certain situations, of which, a severance agreement is not one. Additionally, an employee cannot waive its right to file a charge or participate in an investigation or hearing conducted by the Equal Employment Opportunity Commission. These are just two examples of federal restrictions on the terms of severance agreements.

In all, a severance agreement may be able to provide an employer peace of mind, and prevent a messy legal battle in the future. In order to take full advantage of this tool, an employer must ensure that it complies with all applicable rules and regulations when entering into a severance agreement with a former employee. Oftentimes, professional advice should be considered in order to ensure full compliance.

Our Interest in Serving You:

My law firm’s goal is to give understandable information and to foster discussion about real-life issues facing human resource professionals. If we are not achieving that goal or if you would like us to address other employment law issues, please email me at amann@ndlaw.com. We promise to take your comments and ideas to heart.

Disclaimers
(Otherwise known as “the fine print”)


I make a serious effort to be accurate in my writings. These articles are not exhaustive treatises, though, so do not consider them complete or authoritative. Providing this information to you does not create an attorney-client relationship with my firm or me. Do not act upon the contents of this or of any article on our homepage or consider it a replacement for professional advice.

Reprinted with permission from an article submitted for publication in the May, 2018 Southwest Area Human Resource Association newsletter.