Severance Agreements: Parting is Such Sweet Sorrow? Part II

Previously on The Emplawyerologist: we expounded on severance agreements, and its typical provisions– and I left you hanging with the introduction of general release clauses. What is a general release clause (in the context of severance agreements), what do they do, what are their limitations and how might such a clause read? Just to keep you all on your toes a bit, let’s start by answering the last part of that question. A typical general release clause in a severance agreement might read as follows:

Employee agrees that the consideration set forth above (severance pay) which is in addition to anything of value to which Employee is or might otherwise be entitled, shall constitute a complete and final settlement of any and all causes of actions or claims Employee has or may have had or may have up to the date of this Agreement, including, without limitation, those arising out of, or in connection with Employee’s employment and/or termination by Terrible Terminators, Inc pursuant to any federal, state or local employment laws, statutes, public policies, orders or regulations, including without limitation, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, The Americans with Disabilities Act, the Family Medical Leave Act and [certain state] laws.

Let’s now translate this clause into English: An employee signing a severance agreement with this type of general release, in exchange for severance pay and, perhaps some extension of benefits, is giving up his or her right to sue the employer under federal and state employment laws, most of which would deal with allegations of discrimination.  (Severance agreements to employees over 40 must comply with the Older Workers Benefits Protection Act (OWBPA), which The Emplawyerologist will cover next week.)

Ceements. Here are some of the most common ones:

1. The employee does not have to accept the severance pay and does not have to sign the severance agreement. If s/he refuses to do so, s/he will be free to file employment-related lawsuits and/or administrative claims.
2. The employee can demand more money or benefits than you offered in exchange for signing the severance agreement. The employer will then have to decide how much that measure of control over the former employee’s post-termination behavior is worth. The amount the employee is demandian you see the advantages here? The terminated employee receives money and an extension of his or her health benefits. S/he therefore is not simply thrown out on the street with nothing. Since there is no law mandating that an employee receive severance benefits, s/he is receiving something beyond that to which s/he is already entitled. The employer has bought the right to exercise some control over the employee’s post-termination behavior, particularly if the severance agreement also includes non-competition, non-solicitation, no-hire and confidentiality clauses. So, now we have gotten to the crux of the matter. Here is why an employer might offer severance pay and a severance agreement: the employer has determined that it is worth its while to pay for that control. In fact, paying a lump sum now could result in a savings over the long-term by avoiding the cost of a long, protracted lawsuit.

   Before we move on, I do want to mention that severance agreements should also include a “no admission of any liability clause”, including any liability arising out of federal, state, local law or contract, as well as a requirement to keep the existence and terms of the severance agreement confidential and to refrain from making any derogatory, maligning statements.

   If you have been following The Emplawyerologist (or employment laws in general) you know by now that there are pitfalls to avoid in drafting and offering severance agreements.

   Settling may still be considerably less than the cost to defend a lawsuit. At the same time, the employer may feel that the risk of a lawsuit (or a successful one at any rate) is low enough to refuse to provide more than the original offer.

3. An employee’s waiver of rights have to be knowing and voluntary to be valid. In large part, this means that the employee has to clearly understand what rights s/he is giving up and s/he must be doing so under circumstances that the average, “reasonable” person would feel are voluntary, rather than under threats or coercion. The waiver must also be clearly written, so that the average person would understand that s/he is giving up the right to file a lawsuit alleging discrimination or other violation of federal and state employment laws.
4. If the employee is over 40, the severance agreement must contain language that complies with the Older Workers’ Benefit Protection Act. I know I said this above, but this is important–so much so, that it will be the subject of next week’s post. I said that already, didn’t I?
5. Not every legal right is waivable. While severance agreements and packages can head off lawsuits, severance agreements that attempt to prevent employees from filing a charge with the EEOC (and often state counterparts) or participating in an EEOC (or state) hearing, investigation or proceeding are unenforceable. Wait a minute! Doesn’t that essentially defeat the purpose of offering a severance package? The employee gets severance pay but can still get another bite at the apple by filing an EEOC charge or one with a State civil rights agency? Well, sort of but not really. Think of it as the difference between filing a private lawsuit for money damages, versus being the complaining witness in a criminal trial. In the latter example, the complaining witness cooperates with the authorities but does not receive money or any other type of “reward”. A severance agreement cannot prohibit the latter, but it can prohibit the former, which is usually far more costly.

OK, let’s end this week’s post with one more thought. What happens if an employee signs a severance agreement with a general release and later files a lawsuit, alleging discrimination? First, the employer can move to dismiss, based on the severance agreement. The employee may also have to return the severance pay before s/he can file suit. It depends on the statute that forms the basis for the suit. For example, under the Age Discrimination in Employment Act, an employee does not have to return the severance pay. Other laws, such as Title VII are less clear. With a properly worded severance agreement, supported by adequate consideration, the claim should be dismissed.

OK, that’s all, she wrote–at least until next week when we cover severance agreement provisions and compliance with the OWBPA–which I believe I mentioned already!

Disclaimer: The contents of this post are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent local employment counsel on any issues discussed here.

Click here to learn more about Janette Levey Frisch, author of The Emplawyerologist

Got requests or ideas for topics you would like to see covered by The Emplawyerologist? Better yet, would you like to be a guest blogger? Email The Emplawyerologist at theemplawyerologist@gmail.com