Many employers are hesitant to terminate underperforming or redundant employees because they fear becoming embroiled in litigation. This reluctance may be justified in the case of separations involving employees who have recently been on a medical leave, have previously complained about harassment, discrimination or another workplace condition, or are generally known to be litigious.
To mitigate this risk, savvy employers will consider extending severance pay (or other benefits) to departing employees. Faced with unemployment, the promise of continued compensation, even for a relatively short period, is often too valuable for a departing employee to refuse. When drafted carefully and correctly, a pre-litigation severance agreement is enforceable and will bar the employee from asserting most claims against the employer. However, without appropriate care, a separation agreement may not be enforceable to the extent anticipated, or may not be enforceable at all.
This article discusses some practical considerations and tips for employers in negotiating pre-litigation severance agreements.
A separation agreement is a contract and, as such, must be supported by consideration. Where a severance payment and/or other benefits will be provided in exchange for a release of claims, the severance benefits must be above and beyond compensation to which the employee is already entitled under his or her employment agreement (if applicable), or under the employer’s handbook or other policies.
Accordingly, an employer whose policies provide for severance benefits to be extended unconditionally to departing employees must provide some additional benefit to the employee in order to support the release of claims. Absent such consideration, the severance agreement (and the release) is likely unenforceable against the employee.
During severance negotiations, employers commonly offer to not dispute an employee’s application for unemployment benefits. While this seems like a harmless concession, an employer should be careful about how such a provision is phrased, particularly if the facts of the separation may not support an award of unemployment benefits.
Both federal and state law require employers to provide truthful responses to inquiries from state unemployment agencies, and failing to answer all or a portion of an agency’s questionnaire may also be unlawful. Thus, rather than simply providing that the employer will not oppose an employee’s application for unemployment benefits, a severance agreement might state that the employer will not take affirmative steps to contest the employee’s eligibility for benefits, but that the employer will provide accurate, truthful information in response to any queries from the agency.
However, where the facts of a separation clearly do support an award of unemployment benefits – such as a reduction in force or a termination for unsatisfactory work performance, as opposed to misconduct – the severance agreement can simply specify what the employer will tell the state agency as to the reason for the termination.
During severance negotiations, employees sometimes request that the employer provide a positive employment reference. Except where a favorable reference would be truthful – such as where a high performing employee is laid off because of redundancy or a lack of work – we generally recommend that employers adopt and not deviate from a neutral reference policy stating only the dates of employment, job title and salary.
The severance agreement should also state whom the departing employee will identify to a subsequent employer as the contact for an employment reference,
in order to avoid an unintentional breach of the employer’s agreement to provide a neutral reference.
When dollars become a sticking point during separation negotiations, the employer may want to consider offering to continue paying a portion of the departing employee’s health insurance premiums for a period after the separation. Payments for health coverage can be more palatable to frustrated managers in such negotiations, and are also likely to provide departing employees, especially those with dependent spouses or children, with the security of continued healthcare coverage.
Any agreement providing for continued payment of a departing employee’s health insurance contributions should also stipulate that such payments will cease upon the employee’s becoming eligible for insurance coverage through another employer.
When separating an employee who has entered into restrictive covenants – such as non-compete or non-solicit agreements – there may be opportunities to sweeten the consideration provided to the employee with no detriment to the employer. In some states, non-compete restrictions are unenforceable when the employer involuntarily separates the employee, and in nearly all states, they are more difficult to enforce in that circumstance. Employers should consider whether to waive, or significantly reduce, non-compete obligations as part of a severance package.
By contrast, confidentiality (or non-disclosure) agreements are generally enforceable post-employment, regardless of the nature of the separation. Employers should take appropriate steps during any separation to ensure that their confidential information will be protected.
In separation negotiations, a common demand from employees is a mutual release or mutual non-disparagement provision. Employers should be wary of agreeing to such mutual obligations without careful consideration, as they can have unforeseen and sometimes far-reaching consequences.
Any mutual release should carve out intentional or willful misconduct, such as embezzlement or fraud, as the employer may learn of such misconduct only after the employee has departed. Any mutual non-disparagement provision should be limited to a handful of specifically designated employees to which the restriction applies, to avoid having the entire organization unwittingly bound by the provision. Indeed, an employer may want to consider whether a non-disparagement provision should be included at all, as such covenants are often costly and difficult to enforce.
The release in a severance agreement waives only claims which precede the execution of the agreement. Accordingly, if the employee continues to work after signing the severance agreement, and a dispute over wages, benefits or any other employment issues arises thereafter, those claims will not be released. Retaliation claims can arise in this context as well.
To avoid such potential claims, an employee generally should not be permitted to sign a severance agreement until after his or her employment has ended. Presenting the agreement to the employee during the exit interview can be a convenient way of ensuring this.
Nonetheless, in some cases, an employer may have good reasons for wanting an employee to sign a release before his or her employment has ended. For instance, if an employee has raised problematic legal claims that the employer is eager to extinguish, it may make sense to allow the employee to sign a release before his or her final day of employment. In that event, however, the severance agreement should include a separate “affirmation” for the employee to sign after his or her termination, reaffirming the release and extending its reach through the employee’s departure date.
Finally, employers need to be sure to comply with any technical requirements applicable to a severance agreement. For instance, under the federal Older Workers’ Benefit Protection Act (“OWBPA”), an employee who is 40 or older needs to be given at least 21 days to review the agreement before signing it (though the employee may choose to sign earlier) and seven days to revoke the agreement after signing it, and the agreement should specify that the employee has been advised to consult an attorney.
In the case of a “group” termination – typically, though not always, a formal reduction in force (or “RIF”) – the OWBPA review period is extended to 45 days, and certain information about the decisional process must also be provided to the employee in writing.
On top of these federal-law requirements, state laws may impose additional obligations upon employers in securing releases of claims.
When carefully considered, a pre-litigation separation agreement can provide both the employer and employee with certainty and closure. It should go without saying, however, that prior to presenting any such agreement to an employee, an employer should consult with experienced counsel to ensure the proposed agreement will provide the benefits and protections sought. Our attorneys have significant experience both guiding employers through separation negotiations and drafting and reviewing separation agreements.