Separation and Severance Agreements
I. Separation and Severance Agreements
In order to facilitate smoothly transitioning an employee out of the company, employers often offer a severance or separation agreement. Such an agreement provides the employee some form of benefit package in exchange for the employee’s waiver of their right to sue the company. The employer’s policies or the individual employee’s employment agreement with the employer may also mandate the offering of a severance agreement. Regardless, the employer’s usual legal reason for offering severance is to induce the employee to waive their right to sue.
II. Common Provisions in Severance Agreements
Most severance agreements will outline the agreed-upon restrictions the employee undertakes in order to receive the severance money. The following types of provisions are common within a severance agreement:
- Release of claims – The most common provision in a severance agreement which constitutes a release of the employee’s right to sue the employer in connection with their termination from the company. A well-structured release won’t protect just the employer, but any other relevant parties, like specific directors and agents of the company, subsidiaries and corporate parent entities. Employers should keep in mind that there are some claims that are not able to be released. For instance, claims under the Fair Labor Standards Act (“FLSA”) cannot be waived without approval from a court or the Department of Labor.
- Non-disparagement – A provision which mandates the employee not speak poorly about the company, both privately and publicly. Depending on the situation, and which party has leverage in negotiating the agreement, these provisions are often made mutual to ensure a clean and amicable separation between employee and employer. Sometimes, due to the size of the company, the employer may push to limit the non-disparagement clause to certain individuals who were most relevant or involved in the employee’s work. They take this stance because it would be onerous on employers to be accountable for what every employee might say, especially if the company has hundreds of employees. Often, these provisions include carve-outs for cooperating with a legal process, like the ex-employee or an executive of the employer giving testimony under a subpoena.
- Non-compete – A provision which mandates the employee not work in a specific type of role or in a certain industry. Non-competes must be reasonable in their type and within a certain geographical scope and for a specified amount of time. However, non-competes require careful drafting and courts are increasingly refusing to enforce them.
- Payment Terms – Often overlooked, this provision is the most easily negotiated between the employee and employer. Employees should seek experienced employment counsel to ensure they receive their severance funds in a timely and favorable manner. The severance payment can act as incentive for the employee agreeing to release his various claims, like wrongful termination, against the employer. Additionally, the payments are often structured as continued salary payments, to ease the stress of the employee having to find a new job.
III. Difference Between Severance Pay and Wages Earned
When evaluating the fairness of a severance agreement, it’s important to distinguish between severance pay and wages earned. Severance pay is more akin to a purchase of the employee’s rights – a payment made by the employer, so the employee agrees to act (or not act) in a certain manner.
In contrast, wages earned are wages the employee secured prior to termination. Further, wages earned include wages the employee will earn from the date they received the notification of termination through the date they actually stop working for the company. Employers owe earned wages to the employee independently of any sort of severance package and are typically legally obligated to pay them. However, a common issue may arise with regards to accrued bonuses. If an employee earned a bonus which they have not received, their employment agreement might include terms (e.g. firing for cause) which allow the employer to withhold the bonus, even though the employee has already earned it. Ultimately, it’s important to have an experienced business attorney help to distinguish the earned wages owed under individual employment agreements.
IV. How Employer’s Administer Severance
Severance agreements can be informal or formal. As mentioned, severance can range from a one-time cash payment on a case by case basis to a payment plan, including health benefits and pro-rated bonus compensation, based on a formal employment agreement provision. Further, severance can depend on how the employer classifies each employee. Employers may determine the recipients of severance based on:
- The employee’s position;
- Their status as a full or part-time employee;
- The circumstances surrounding the employee’s termination; and,
- The company location the employee operated from.
Not all employees are entitled to severance, but it’s important to have an experienced business attorney review your case to decide whether you are entitled to severance or not. More importantly, you should also consider whether accepting the severance pay is in your best interest.
V. The Employee’s Right to Sue
Prior to signing a severance agreement an employee should consider the circumstances surrounding his or her termination. There are many viable claims an employee could bring against their employer, which they may be effectively signing away by agreeing to a severance package. For information on potential claims see our Wrongful Termination webpage. If you believe you were subject to any of the listed discriminatory actions, please contact our office or another experienced employment attorney before signing any severance or separation agreement.
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