Letting Go of an Employee? Protect Yourself With a Severance Agreement

Am I Legally Required to Pay Severance to a Departing Employee?

One question that we get from employers and business owners all the time is “Am I legally required to pay severance?” The general answer is no, but the conversation doesn’t end there. In certain circumstances, an employer may be required to pay severance, such as when the employment agreement or employee handbook provides for the payment of severance to employees upon termination; if the employer indicated during the hiring interview that the company pays severance as an inducement for the employee to join its ranks; or if the employer’s past actions have created a pattern or practice of paying severance to departing employees, such that not paying severance to a particular employee could be viewed as discriminatory.

If I’m Not Required to Pay Severance, Are There Reasons Why I Might Want to Anyway?

There are generally two schools of thought when it comes to offering severance to a terminated employee: (1) employers who want to reward employees for their service to the company by giving them a cushion against unemployment, and (2) employers who want to protect themselves from future legal claims by discharged employees. Employers in the first group might offer, for example, two weeks of pay for each full year of employment with the company, continuation of health insurance benefits at the employer’s expense, job placement assistance, and/or a letter of recommendation. Each of these options may have important legal implications, depending on the situation, such as violation of the company’s health insurance policy, which may prohibit the employer from keeping terminated employees on the group plan (instead through the more expensive continuation benefits provided by COBRA), or possible liability associated with commenting on a former employee’s work performance to a prospective employer.

Employers in the second group want to pay severance in exchange for an agreement from the terminated employee not to sue the company in the future. In order for such an agreement (called a “release”) to be enforceable, the employer must give the former employee something of value that he or she would not otherwise be entitled to receive by law or contract (also known as “consideration”). Many times business owners ask us if payment of an employee’s final paycheck or cashing out the employee’s accrued but unused vacation counts as sufficient consideration for a release. If the final paycheck only consists of earned wages for work performed by the employee and if the employer is required to pay the employee for accrued but unused vacation by law (as in California) or under the terms of an employment agreement or employee handbook, then such payments would not constitute sufficient consideration for a release. Consideration must be something in addition to anything that the employer would be required to provide to the employee upon termination. Any agreement not supported by adequate consideration would not be enforceable.

If I Decide to Pay Severance, What Should I Include in the Severance Agreement?

Severance agreements that include a release provision require departing employees to give up important legal rights and, for that reason, they are complex documents that are governed by many different laws and regulations. Some of the provisions that may be (or, in some instances, are required to be) included in such a severance agreement are, for example:

• A description of the severance benefits provided by the employer;

• A general release, which includes a detailed list of rights that the former employee is giving up;

• A covenant not to sue;

• A notice and acknowledgment of rights under the Older Workers Benefit Protection Act, which must include an extended notice period, revocation period, and additional rights to terminated employees aged 40 and older who give up their right to sue under the Age Discrimination in Employment Act;

• A confidential information provision that protects the employer’s proprietary business information and trade secrets;

• A protected rights provision, which explains the rights that the departing employee will not be giving up;

• A notice that the employee has a right to consult with independent legal counsel before signing the agreement;

• A choice of law provision;

• An arbitration provision; and

• Other contract provisions designed to ensure that the contract will be legally enforceable.

Because of the complexity of severance agreements, they should be drafted with the advice of legal counsel.