Severance Agreements, Employment Contracts, Terminations and Disputes
Negotiating Severance/Termination Agreements and Contracts
Negotiating a severance agreement or contract as part of the termination process can be quite difficult and emotionally taxing for both the terminating employer and the employee who is suddenly without a job and a paycheck. Even so, it is important that emotions be set aside and the severance agreement be discussed in a business-like fashion to minimize the trauma and maximize the benefits for both sides.
For an employer, the goal may be to reward a long-term employee, lessen the trauma of the termination and prevent a possible lawsuit as a result of the termination. For the employee, the goals are likely to maximize the amount of money obtained as part of the severance, obtain all of the benefits that she or he is entitled to and ensure that his or her subsequent job search is not hampered by having been terminated.
The goal should be to reach a fair and equitable agreement that offers adequate protection for both sides. The focus should be on the economics of the situation without regard to emotions and issues that led to the termination. The following is an outline for some of the topics that should be addressed and included in the severance agreement.
This is typically the most significant item in the agreement for most employees. Generally, employers offer severance packages in terms of weeks. Many employers base their severance pay policy on an employee’s length of employment. The most common is to offer one week of severance pay for each year of service. Some employers do not offer any severance at all. In negotiating the pay, reference is typically made to severance pay that other terminated employees in the company have been offered.
An accurate accounting should be made of the earned and unused portion of vacation that the employee is entitled to. The employer is obligated to pay the employee for the earned but unused vacation time.
Accrued Commission or Other Employment Benefits (401K, profit-sharing, etc.)
A thorough review of the employer’s written policies is necessary to determine what commission, if any, that the departing employee is entitled to on sales that have been made or pending. The policy should also dictate what profit-sharing, 401(k) benefits that the departing employee has earned or is entitled to at the time of termination.
Status of Any Non-compete Agreements or Restrictive Covenants
If the employer and employee signed a non-compete agreement or restrictive covenant, the severance discussion should include a reminder to both parties of its existence and terms to avoid future violations and possible lawsuits. Employers should remind the departing employee, who might have forgotten, the terms of the non-compete agreement and provide a copy to him or her prior to departure. If any changes need to be made to the restrictions, such should be negotiated and included in the severance agreement.
Continuation of Health Benefits (Cobra)
Both parties should also discuss the continuation of benefits, how long such will last, the due dates of any payments by the terminated employee for health insurance, where and how payments are to be made. The parties should also document that the employee has been offered the option, the associated costs and the employee’s decision whether or not to accept the continuation of benefits.
Return of Equipment and Other Property
A severance agreement should spell out what property of the employer is in the possession of the employee and when and how such should be returned. Also, if the employer has property belonging to the employee, the agreement should specify when and how those would be returned.
Reference Letter/Communication with Prospective Employers
Given that the terminated employee is likely to seek new employment immediately, the parties should discuss and document the method for handling calls from prospective employers and references. A record of termination sometimes hurts a subsequent job search, especially if the reason for termination given by the employee is different from the one given by the terminating employer. To assist the employee’s subsequent job search, both parties should attempt to reach an understanding of what should be said to prospective employers.
Eligibility for Unemployment Compensation
The terminated employee may also intend to apply for unemployment compensation. If so, as part of the negotiations, the parties can address whether it is appropriate not to contest the application.
Job Placement/Job Search Assistance
Some companies provide job placement assistance by proving a recruiter or placement agency at no cost to assist the departing employee in a subsequent job search. Most parties prefer to use an independent and unrelated placement agency in order to ensure that the process is objective, confidential, and not tainted by the possibly soured relationship that led to the termination in the first place. If this becomes part of the agreement, the duration and any cost limitations should be spelled out.
The severance discussion and agreement should also address whether the departing employee is eligible for re-employment. Different companies have different policies about reemploying terminated employees and employees that resigned voluntarily. Clarifying this issue will likely eliminate future misunderstandings, confusion and retaliation lawsuits.
Claims to be Waived
Most employers require that employees who are given severance pay agree not to sue the employer thereafter. In fact, most companies that offer severance do so to gain the certainty that no lawsuit will follow the termination whether or not the employee has any grounds for a lawsuit. A severance agreement should contain a comprehensive list of the type of claims and lawsuits that the employee is giving up as part of the agreement. This list is typically very comprehensive and contains almost every conceivable claim, except Workers Compensation claims that cannot be waived in a general release. Employees who sign these agreements should understand that their rights to sue in the future are severely curtailed if not eliminated entirely.
This clause requires that both parties not to disparage each other to third persons. For the employee, this helps with job search because the terminating employer will not make unfavorable comments to prospective employers. For the employer, the departing employee will make no disparaging comments to other workers, clients and/or customers. If both sides decide to include this clause, it is important to define what specifically can be said so that no confusion ensues later.
This clause is typically included to avoid the high cost of lawsuits in case a dispute arises in the future between the two parties. To avoid the costs of lawsuits, some agreements include a clause that any future disputes will be submitted to an arbitrator whose decision will be binding on all sides. Others agree to submit future disputes to binding mediation. Where such is the case, it is important to include the names of acceptable mediators/arbitrators, how one can initiate a request for mediation or arbitration, the deadline for doing so and the venue where the mediation will occur.
Employees Over 40 Years of Age
The Older Workers Benefit Protection Act (OWBPA) permits those employees over 40 years of age to have a minimum of 21 days to review the severance agreement before signing it. They must also be afforded the seven days after signing it to change their minds. For employers, this typically means that payment is withheld for the duration. Under certain circumstances, the employee may waive some of these rights so that the employer does not withhold the severance checks for the entire waiting period.
Our attorneys assist clients in negotiating employment contracts and/or severance packages.
For a pre-determined fee, our attorneys will review an employment contract for reasonableness and sufficiency.
Our attorneys will also review an employment contract, examine the law and prepare written opinion on any terms or portions of the contract that is in dispute.