What All Employees Should Know Before Signing a Severance Agreement
If you’re an employee who has unfortunately found yourself laid off or fired, you may also find in your termination package a document called a separation or severance agreement. Severance agreements are settlement agreements and often offer you compensation or other concessions in exchange for certain legal releases and waivers. The terms of a severance or separation agreement can vary significantly depending on your individual circumstance, but there are (nearly) universal terms every departing employee should understand before signing.
Severance Agreement Key Considerations and Terms
From the outset, it’s critical to recognize your legal rights and what legal rights you may be giving up. You should also take note of any post-employment obligations such as restrictive covenants, confidentiality obligations, return of company property, and the consequences of breaching any of the terms. And while many terms in a severance agreement may appear boilerplate, some of these terms tend to be flexible while others tend to be non-negotiable. It’s important to know the difference. Some of the most key provisions in any severance agreement to understand are the following:
1. Consideration. To make an enforceable agreement, consideration must be offered. Consideration is a legal term of art, however, in most cases, it takes the form of a cash payment. You may not always be offered a cash payment, however, and consideration may in the form of a non-cash enhancement such as a positive reference or waiver of restrictive covenants.
2. Cash Payments. A severance offer is usually based on the multiplier of the employee’s annual base salary and target bonus, or the employee’s base salary for a duration of time. However, the amount offered may also be arbitrary and not based on a particular formula. There are many different considerations an employer (and their counsel) will make when deciding on an amount to offer.
3. Payments for COBRA Benefits. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law that requires most employers maintaining group health plans to offer covered employees and their covered family members the opportunity to continue coverage under the employer’s health plan for a period of time after termination. The demand for COBRA payments typically mirrors the length of the severance period but can vary depending on your needs and prospect in securing health insurance through a new employer.
4. Pro-Rata Bonus Payouts or Incentive Pay. Employers typically rely on policies that require an employee to be actively employed at the time that a bonus is paid to deny those bonuses at termination; however, there may be certain circumstances where this policy is irrelevant, and an employee can still request payout of a bonus or other incentive pay.
5. Restrictive Covenants. Employers, where permitted by law, typically include restrictive covenants in employment agreements and offer letters, and sometimes these provisions appear in a separation agreement as well. These terms are often labeled “non-compete” and “non-solicitation” clauses. You should review all prior employment agreements and policies to determine if you have already agreed to any type of restrictive covenant. Restrictive covenants can sometimes be waived or restricted in scope, and in cases where they cannot, it is imperative to understand your post-employment obligations and restrictions when seeking new employment (or starting a new business) so that you don’t face legal action and/or the revocation of a new job opportunity.
6. Confidentiality and Employer Property. Employers typically include confidentiality provisions which prohibit employees from disclosing the terms of the separation agreement, or the employer’s trade secrets and confidential information. Like restrictive covenants, It’s important to understand your confidentiality obligations to avoid future liability for breach of contract. You will also likely be required to verify that you have returned or destroyed (at the employer’s request) any company property - tangible or intangible - in your possession. There may be legal consequences for failing to return all company property.
7. Non-Disparagement Clauses. A non-disparagement clause is typically used to prevent an employee from making negative statements about its employer (or ex-employer), and the employer’s employees, officers, customers etc. Non-Disparagement clauses should be narrowly drafted, with reasonable exclusions, and if you are concerned that your employer may disparage you, you or your counsel should request a mutual non-disparagement provision.
8. Release Provisions. Separation agreements include a release and waiver of specific legal rights, where you give up rights to sue your ex-employer. These releases will generally include release and waivers for salary and payment issues, wrongful termination including but not limited to discrimination, FLSA claims, unemployment insurance benefits, and may require the withdrawal and dismissal of any legal actions currently pending. Understanding what legal rights you have, and what you are giving up is imperative, especially if you believe you may have a claim against your employer for wrongful termination or misconduct during your employment.
Conclusion
In sum, losing your job can be a difficult and uncertain time, and navigating an extensive legal contract can add more stress to your situation. However, an experienced attorney can help you understand and negotiate your severance agreement, and hopefully lessen the negative impact of your job termination or limitations in finding new work. At Saunders & Saunders, we routinely represent both employers and employees in employment terminations, and can provide valuable insight from both sides of the equation. Have questions or need assistance? Please give us a call at 303-396-0270, or email at christina@saunders-saunders.com.