Severance Agreements: Parting is Such Sweet Sorrow? Part I
Hello Readers! I first want to thank Judy Naamat for her amazing and informative posts regarding the America Invents Act and its impact on employers. I hope you found them as enlightening as I did. Thank you Judy! It was a pleasure having you, and I hope you will consider joining us again in the future.
Now that we have covered employment contracts and their key provisions, how about skipping from the beginning of the employment relationship to the end, and talking about severance agreements? By now I am sure you know the drill. First we need a definition. What is a severance agreement? Let’s try this on for size: A severance agreement is a contract between an employer and employee that specifies the terms of an employment termination.
As with an employment contract, an employer does not have to offer a severance agreement to an employee, though there are many situations in which it will likely be in the employer’s best interest to do so. Hang on, I will be talking about that shortly. If you have been following The Emplawyerologist from the beginning, you will also remember that not having a written severance agreement may not automatically mean that you do not have a severance agreement with one or more of your employees. You might have an implied severance agreement. If this concept of implied contracts does not ring any bells for you (particularly if you joined us after The Emplawyerologist’s first few posts) you can brush up on implied contracts by clicking here and here.
Let’s look at the key provisions that appear in the typical severance agreement:
- Termination of Employment: Arguably this might be the most important provision, because it is the reason you would even contemplate having a severance agreement in the first place. Typically this provision might simply say: “You will no longer be employed by Terrible Terminators Inc as of February 7, 2013″ or “Effective February 7, 2013 your employment with Tommy Terminators Inc is hereby terminated” or something like that. You get the idea.
- Severance Payments: While there is no legal requirement that employers give severance pay to terminated employees, you may recall in the posts on restrictive covenants that a contract must be supported by consideration (something of value) or it will not be enforceable. An employer will not be able to enforce a contract that requires an employee to do or refrain from doing something without providing something of value in return. Severance agreements therefore usually include a payment amount as part of the consideration. A typical payment provision may read say something like this: “Terrible Terminators, Inc, agrees to pay you ___ weeks of severance pay in addition to any unused accrued vacation pay to which you may be entitled. Terrible Terminators, Inc. will pay said sum over a period of ___ pay periods”. Note that the sum does not include unused vacation pay (assuming that the employee is entitled to unused vacation pay). Why? Offering an employee something to which s/he is already entitled is not valid consideration.
- Benefits: Usually a severance agreement will include continuation of benefits for at least as long as the severance period. For example, let’s say that due to unforeseen financial issues, you need to lay off an employee of 8 years. You decide to pay that employee 8 weeks’ severance pay, 1 week for each year of service. Benefits will usually continue for 8 weeks. Why would you continue benefits? That too is part of the consideration. Not only does the employer need to include consideration to be enforceable, but the offer needs to be enough to induce the terminated employee to accept the contract and agree to certain things you want from him or her in exchange. Appropriate severance pay and continuation of benefits is often enough to do the trick. Here is how a typical benefits provision might read: “Terrible Terminators, Inc. will continue to provide you with the current group medical and dental plans, as if you were still actively employed, while you are being paid through its payroll. After severance payments expire, you may continue receiving group medical insurance at your own expense, as provided by applicable federal and state laws”.
- Unemployment Compensation: Here, the employer would state that it will not oppose the terminated employee’s receipt of Unemployment Insurance Benefits. There should also be a caveat that the state’s Division of Unemployment Assistance, and not the employer, makes the ultimate determination as to the terminated employee’s eligibility for such benefits.
- Reference: This would be the place to either tell the employee that it will provide a letter of reference or will cooperate in providing references to any inquiring prospective employers.
- Non-Competition, Non-Solicitation, Non-Hire, Confidentiality No-contact Clause(s): This part starts to get to what employers might call the “meat of the matter”, or one key reason why an employer would offer a severance package with a severance agreement in the first place. Most of these provisions would already be in your employment agreements if you have them. Click here, and here, (and their follow-up posts) for some review. Why then do you need them in your severance agreement? First, it never hurts to remind your employees of certain obligations they have already accepted. Second, if you do not have a written employment agreement, you have a chance to set some limitations on their post-employment conduct in the severance agreement, which again, is probably your motivation for offering a severance package (and agreement) in the first place. Third, what if the employee was promoted through the years and only had access to trade secrets and confidential information after the promotions, rendering such provisions in his/her original agreement unnecessary? Finally, what if your employee has good arguments that those clauses contained in the original employment agreement are unenforceable, invalid, etc? Including them here increases your chances that the post-employment limitations you want to impose will in fact be enforceable. Remember though, the greater the limitations, the more consideration you must be willing to offer. If you want to include a broad restrictive covenant that effectively prevents your former employee from working for the next two years, you need to provide sufficient consideration or a court will likely invalidate the post-employment restriction.
- General Release: Since this post is getting long, and you are all busy people, whose time is valuable, I would like to save coverage of this provision for next week’s post. Sorry for any cliffhanger effect! I promise I will address it next week, so please c’mon back and I’ll see you then!
Click here to learn more about Janette Levey Frisch, author of The Emplawyerologist.