Is a Severance Agreement Necessary for an Employee Who Is Leaving?
If you have an employee who is separating from your company, you may be wondering if a severance agreement is necessary.
When an employee is laid off or otherwise terminated, there are a lot of legalities that come into play. One of the most important pieces of paperwork in this process is the severance agreement.
A severance agreement is a legally binding contract between an employer and an employee. It outlines the terms of the employee's departure, including any financial compensation they may be entitled to. It often includes a release of claims, which means the employee agrees not to sue the company for wrongful termination or any other type of legal action.
With a little creativity, this legal document can actually be used to a company's advantage while following best business practices. By crafting a well-written severance agreement, you can limit your liability, protect your company's confidential information, and set clear expectations for the departing employee.
Here's how to make the most of a severance agreement.
What is a severance agreement and what are its key components?
A severance agreement is a contract that is created and signed by both an employer and an employee when the employee is released from their position within the company. Generally, these agreements outline, in detail, the rights and obligations of both the employee and the employer after an employment separation. Generally, severance agreements include key components such as payment details such as the amount of money to be provided to the departing employee, details about non-compete clauses or other restrictions on working with competition (if allowable in the state), confidentiality, and a release of claims. In order to create a legally binding agreement between an employee and employer it is important these agreements be negotiated in detail and reviewed by an experienced employment attorney, especially as certain circumstances warrant special language in the agreement for it to be legally binding. For example, if the separating employee is 40 or older, the Older Worker Benefit Protection Act (OWBPA) may require the inclusion of specific language to the release to properly release age-related claims against the employer. As another example, if the employee primarily resided and worked in California, an employer may be prohibited from subjecting the employee to another state's laws for the severance agreement.
How can you draft a severance agreement that works for both parties involved?
Here are some tips which could help ensure success: Make sure all necessary elements are present, such as detailed information about the separation date, severance amounts, and other nonmonetary terms. Any contractual obligations should be explicitly stated and referenced in the agreement. For example, if the employee has company property that needs to be returned before the severance amount is paid, the agreement should specifically state this condition.
When to Use a Severance Agreement
So then the big question: When should a severance even be used?
There are a few situations when it may be advisable to use a severance agreement. First, if there is potential litigation, a severance agreement can help protect your company by requiring the employee to waive any legal claims against the company. Second, in some industries, it is standard practice to offer severance packages to employees who are leaving the company. Third, even if there is no potential litigation and no industry standard, there may be nonmonetary benefits that make a severance agreement worthwhile. For example, confidentiality provisions can protect your company's trade secrets, restrictive covenants can prevent the employee from competing with your company, and continued cooperation clauses can ensure that the employee will continue to support your company after they leave. fourth, if you are offering severance pay, you will need to determine how much money to offer. What is considered standard varies depending on the industry and the size of the company. However, it is important to remember that nonmonetary benefits can also be valuable, such as a reference letter or neutral reference from the company, as well as outplacement services.
The first thing to consider is the potential for litigation. If there is any risk that the separated employee may sue the company, a severance agreement can provide valuable protection by requiring the employee to release all claims against the company in exchange for a severance payment. However, it's important to note that not all states allow restrictive covenants, such as non-compete or non-solicitation clauses, so be sure to understand the laws in your state (or the state law applicable to the severance) before including these provisions in an agreement.
In addition to the legal considerations, it's also important to think about the good business practices that a severance agreement can provide. Severance agreements often include confidentiality provisions to protect trade secrets and other confidential information, which can especially be valuable if the employee has not already signed a confidentiality agreement. A severance agreement may also include provisions requiring the separating employee to cooperate with the company after their separation (helpful if there will be transitionary questions) and to not disparage the company or its agents (a nondisparagement clause).
What are some common mistakes employers make when drafting terms of a severance agreement?
One of the most common mistakes employers make when drafting a severance agreement is trying to include terms that may be difficult for an employee to accept. For instance, if an employer includes language prohibiting an employee from obtaining future employment with a competitor, it could backfire since competition laws don’t always allow such restrictions (and in some cases, it may give rise to a claim against the company for trying to enforce a restraint against trade). It is essential to check the current applicable laws and regulations of a jurisdiction, as well as any applicable collective bargaining agreements or individual contracts. For example, an employer should review any previously signed employment agreements for the departing employee to determine if there are certain obligations either on behalf of the employer or the employee that may be incorporated into the agreement (for example, do they already have an agreed-upon severance provision? did they agree to continue cooperation after employment?).
Additionally, employers should be aware of any applicable wage and hour, discrimination, or unfair dismissal laws so they can ensure all termination provisions are in compliance; failure to do so could lead to costly lawsuits. For example, federal courts have held that an employee cannot "release" entitlement to unpaid wages in a severance agreement - and therefore, it is important that the language of the severance agreement anticipate this situation if there could be a potential claim for the best protection of the company.
Ultimately, having a clear understanding of all relevant rules and regulations when drafting a severance agreement helps employers avoid unnecessary complications or disputes in the long run.
What terms are most beneficial to include for an employer in a severance agreement?
An employer's severance agreement should include clear and concise terms to ensure it is tailored to the individual employee's situation. Highly advantageous terms to consider would be a severance payment, a non-disclosure of confidential information, and potentially a nondisparagement provision. Well-thought-out provisions within one's severance agreement can be mutually beneficial for both parties involved and help expedite a seamless transition during times of change.
Another key consideration is the amount of compensation to be offered as part of the severance agreement. We are often asked "What's standard?" The answer is that there is no standard amount for severance, as it depends on a variety of factors, including the length of service and the level of the employee.
However, it's important to keep in mind that nonmonetary benefits, such as a reference letter or neutral reference, outplacement services, and compensation for COBRA benefits, can also be valuable to the separating employee.
The circumstances surrounding the separation are also important. For example, it's not standard to offer severance to an employee who voluntarily resigns, but you may consider offering one to an employee who is laid off or a long-term employee. Additionally, some employment agreements have built-in severance provisions, such as if an employee is separated without cause. If this is the case, there may already be an obligation to pay severance with the terms already decided.
Severance agreements can be an important part of the separation process for both employers and employees. By knowing what to include in a severance agreement, employers can draft terms that are beneficial for them, while employees can negotiate fair severance payments. There are some key components to consider when drafting a severance agreement, as well as legalities to be aware of. Nonmonetary benefits may also be included in a severance agreement, depending on the situation.
In conclusion, determining whether a severance agreement is necessary for a separated employee requires careful consideration of the legal, business, and practical implications. If you're considering entering into a severance agreement or have questions about how they work, contact us for more information. We'd be happy to help. As an employment lawyer with over 12 years of experience in this area, Wagner Legal can help you navigate this process with confidence. Whether you need help drafting a severance agreement, negotiating the terms, or understanding your rights as an employee, Wagner Legal is here to provide the guidance and support you need.
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