4 Things to Know for Employment Severance Agreements

Employee severance agreements are becoming increasingly common in the modern workplace. With the ever-changing business landscape, companies often find themselves having to restructure, downsize, or lay off employees.  Employers often find themselves in situations where they have to navigate separating from problematic employees.  Conversely, employees sometimes find themselves victims of problematic and potentially unlawful employment practices and have to part ways with their employer.  In such situations, severance agreements can help protect the interests of both the employer and the employee.

Drafting an effective severance agreement requires a thorough understanding of the relevant laws and legal issues. Unfortunately, I have seen numerous instances where employers have failed to properly draft these agreements, leaving them vulnerable to legal challenges; or, employees have signed questionable severance agreements that lack the proper benefits or legal protections.  In this article, I will provide 4 things to know when facing an employee severance situation.

1. Consideration: The agreement must provide adequate consideration to the employee. This typically takes the form of a lump sum payment or salary continuation for a specified period, but can also include other forms of compensation such as continued health insurance coverage, outplacement services or other benefits.  If the agreement only provides benefits to which the employee is already entitled, it lacks consideration and will not be enforceable.
2. Non-compete, non-solicitation, and non-disclosure clauses: Non-compete, non-solicitation, and non-disclosure clauses can be included in severance agreements to protect the company’s clients, trade secrets, and proprietary information. However, such clauses must be carefully crafted to ensure that they are reasonable in terms of scope and duration.  In addition, non-disclosure clauses must comply with state and federal laws, including the National Labor Relations Act, which protects employees’ rights to engage in protected concerted activity.
3. Waivers of rights and releases of claims: The agreement typically also includes a release of claims against the company along with waivers of the employee’s rights to bring legal action against the company. This means that the employee is giving up his or her right to sue the company for any claims arising out of their employment.  However, there are limits to what can be released, and certain claims such as workers’ compensation or unemployment benefits cannot be waived.  Waivers must be drafted in a clear and specific manner, and must comply with state and federal laws.
4. Proper execution: The agreement must provide the employee with adequate time to review and execute the agreement.  For certain severance agreements, allowing up to 21 or even 45 days is required.  In addition, certain severance agreements must allow the employee a 7-day window to revoke the agreement after he or she signs it.

Drafting an effective employee severance agreement requires a thorough understanding of the relevant facts and legal issues. The agreement should be tailored to the specific needs of the company and the employee, and should be drafted in compliance with state and federal laws.  The best way to ensure these goals are accomplished is to consult with a qualified attorney.

Jeff Burke is an attorney at MacElree Harvey, Ltd., working in the firm’s Employment and Litigation practice groups. Jeff counsels businesses and individuals on employment practices and policies, executive compensation, employee hiring and separation issues, non-competition and other restrictive covenants, wage and hour disputes, and other employment-related matters. Jeff represents businesses and individuals in employment litigation such as employment contract disputes, workforce classification audits, and discrimination claims based upon age, sex, race, religion, disability, sexual harassment, and hostile work environment.  Jeff also practices in commercial litigation as well as counsels business on commercial contract matters.