It’s no secret that a severance agreement can be an effective risk-management tool. When done right, the separation agreement will forever bar legal claims by the employee who signs it. The question is: do you do yours right? Employers need to be aware of numerous key issues when drafting severance agreements. Below are three of these important factors, which all Human Resource managers should consider before asking an employee to sign on the dotted line.
1. Give Time for the Employee to Evaluate the Agreement
How do employees convince a judge to invalidate a release agreement that they signed? Mainly by demonstrating that the employer coerced the employee into signing, or otherwise put the employee under duress. Or by showing that the employee did not fully understand the release, and so did not “knowingly” and “voluntarily” release claims against the employer.
Avoid these arguments by giving the employee sufficient time to consider whether to enter into the release agreement. In fact, federal law—the Older Workers Benefit Protection Act (OWBPA)—requires such time (21 days to be exact) if the employer wants an employee who is age 40 years or older to give up a claim for age discrimination. Then the employee must be given 7 days after signing the agreement to revoke their acceptance. (The OWBPA also imposes other requirements, which can be found here.)
Even when the employee is under 40, and not entitled to 21 days, the employer should consider giving 5 or 7 days for the employee to evaluate the agreement, and then, possibly, 2 or 3 days to revoke. Such provisions help ensure that the employee’s release of claims was knowing and voluntary, and not the result of duress or coercion.
2. Allow the Employee to File Charges with Government Agencies
While it may be tempting to add language to the agreement that would seem to prevent the employee from filing claims with government agencies, employers should tread lightly. Such clauses do not and cannot prevent the person from filing a charge with a government agency like the Equal Employment Opportunity Commission (EEOC), or from participating in governmental investigations or proceedings.
Employers should clearly state that the restriction does not prevent the employee from doing these things now or in the future. You can, though, specify that the employee may not collect additional money damages as the result of a charge filed with the EEOC or comparable state agency.
3. Ensure That You are Giving the Employee Something of Value
A valid and enforceable severance agreement, like any contract, requires adequate consideration. In return for giving the employer something valuable—mainly, a release of legal claims—the employee must receive something that they are not otherwise entitled to receive.
That’s the severance pay. Money or benefits that the employee has already earned (such as wages and vacation or paid time off) cannot satisfy the adequate consideration requirement, because the employer is already legally entitled to give them to the employee.
|To get a detailed overview of issues impacting severance agreements, please join David Monks—of the national employment law firm Fisher & Phillips LLP—for the webinar: “Severance Agreements: When to Use Them and How to Draft Them to Limit Company Liability,” on August 8, 2018 at 1:30 p.m. EST. Click here to reserve your spot today!|
An effective severance agreement can help you reduce legal risk. As with any type of employment agreement, the devil is often in the details that get overlooked. Beware of old, form and “off-the-shelf” agreements that you can find online.
If your agreement has not been reviewed by counsel in the last year or so, now is the time to make that happen. Severance agreements are not a “one size fits all” tool.
Additional Q&A on Severance Agreements
Q—If the employee signs the severance agreement and takes the money, do I have anything to worry about?
A—In most cases, no. But sometimes a discharged employee—often after later speaking with an attorney—has “buyer’s remorse” and decides that the money they received was not enough.
If they sue and convince the court that they did not really understand what they were signing or that they felt coerced into signing, then the court can invalidate the release agreement and let the lawsuit proceed. So, the content of the agreement and the manner in which the offer and agreement are conveyed to the departing employee are important issues.
Q—Should we always give severance pay to an employee who we are firing or laying off?
A—No. A severance agreement is a risk management tool. If you believe that there is very little chance that the employee will assert legal claims, then why give them money? On the other hand, if you give money because you want to help the employee’s transition to their next job, then get something back for it—a release agreement—just in case they speak with a lawyer and later try to pressure you into a settlement for claims that have no merit.
|David Monks is a partner in Fisher Phillips’s San Diego office. He counsels employers on a wide variety of matters, including employee discipline and termination, wage-and-hour issues, disability accommodation protocols, family and medical leave issues, investigations of harassment and other misconduct, and independent contractor issues.
In addition, Mr. Monks has substantial experience defending employers and managers against lawsuits and administrative claims involving discrimination, harassment, defamation, breach of contract, and violations of wage-and-hour laws.