The primary reasons that businesses offer severance packages to departing employees include to: 1) reward them for their services and tenure at the business; and/or 2) in order to obtain a waiver and general release of claims from the employee, and to ensure that the employee will not take legal action against the company in the future; and/or 3) to confirm that the employee agrees to continue to be bound by a restrictive covenant, such as a confidentiality provision, non-compete agreement or a non-solicitation agreement.
A severance agreement is a contract, which once properly executed is enforceable in Court. Like any other contract, the terms of a severance proposal should be carefully reviewed with legal counsel and are often negotiated – sometimes between the parties and other times between lawyers. Because the parties are agreeing to be bound to contractual terms and/or relinquishing certain rights, such agreements must be carefully considered during a period of transition for both the company and employee.
Some severance offers are simply an agreement to pay the separating employee either a lump sum of money or recurring payments over a period of weeks or months in exchange for a general release or waiver of claims. Other severance offers are more comprehensive, and may selectively include some or many of the following terms:
Continued insurance coverage or other benefits (health insurance, dental, life, disability etc.);
- The extended vesting of employee stock options or profit sharing;
- A letter of recommendation or a non-disparagement agreement;
- A re-characterization of the employee’s departure as “voluntary”;
- An agreement by the employer not to contest unemployment benefits;
- An agreement by the employer to pay for the employee’s career counseling;
- Relocation expenses (if applicable); and
- Assurance from the company that it will narrow or not enforce a restrictive covenant, such as a non-competition agreement or a non-solicitation agreement.
Employers will generally seek to include severance terms that bring closure to the matter. Employer’s will invariably include terms that limit the likelihood of having to defend a lawsuit, avoid bad publicity or the dissemination of disparaging information, while protecting intellectual property, including their valuable trade secrets.
From the employer’s perspective, it is agreeing to pay a certain sum of money that it is otherwise not necessarily legally obligated to pay, in consideration for a release of potential legal claims that the employee may otherwise pursue. If there are strong claims or potential claims by an employee, the employer has and increased incentive to secure a release from the separating employee so that costly and prolonged litigation might be avoided. On the other hand, employers are often concerned about setting a precedent of large payouts, particularly in this fragile economic climate where reckless spending can contribute to a company’s downfall.
From the employee’s perspective, a comprehensive review of the proposed severance is crucial. First and foremost, does the employee have strong legal claims against the employer, such as discrimination, breach of contract, or a wage violation (including overtime)? If so, does the severance offer approach or exceed the potential value of such claims verses the costs of litigation? It is important for employees to ensure that the non-monetary terms are balanced, reasonable and when at all possible, mutual.
While employees are not legally entitled to severance packages, well negotiated and carefully drafted severance agreements can be of great benefit to both employers and employees. As straightforward as some of the severance agreement issues might appear, there are many traps for the unwary with seemingly innocuous terms having ramifications well into the future for all parties.
Bennett & Belfort, P.C. regularly drafts, reviews, negotiates and litigates severance agreements and related issues.