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Severance and Separation Agreements

Written by: Charles Krugel

Article Overview: One topic I get a lot of questions about is severance and separation agreements. Although there's a distinct difference between the two, and some overlap, with some guidance the costs and benefits of both types of agreements can be understood and used to a business' advantage.

Severance and Separation Agreements

One topic I get a lot of questions about is severance and separation agreements.

Generally, severance refers to giving an exiting employee a monetary bonus or settlement above and beyond their regular compensation. A separation agreement usually refers to an agreement wherein the exiting employee promises not to sue, file a regulatory agency complaint, take business or information with them, or compete with their former employer. In return, the employer gives the employee something of value (usually money).

So, a business could give an exiting employee severance without a severance or separation agreement, but usually doesn't use a separation agreement without awarding some form of severance (i.e., consideration). If this is confusing, the below will hopefully clarify my point.
Recently, a client me asked about a separation agreement for an employee over the age of 40.

Relative to dealing with an employee who's 40 or older, if the employer is seeking a release of all claims pursuant to the Age Discrimination in Employment Act (ADEA), there’s a 21/7 rule that applies. Under the rule, which is actually contained in Section 201 of the Older Workers Benefit Protection Act, a release of claims under the ADEA is only valid if the employee's release is "knowing and voluntary." More specifically, in order to be "knowing and voluntary," the exiting employee has 21 days to review the agreement, with or without legal counsel, and has an additional seven days in which to revoke their signature (beyond the initial 21 day review period). Other requirements may apply given certain considerations. In short, depending on the nature of the separation agreement, the 40 and older employee might have rights not afforded to younger employees.

Regardless of the exiting employee's age, a separation or severance agreement that's intended to release the employer from all known or unknown claims is essentially the employer's purchase of the employee's agreement not to sue or file a complaint with a government agency, not to take business or information to a competitor, or sometimes, to not even work for a competitor.

When I'm initially contacted about this type of employment agreement, I ask the client why they think they need such an agreement. More specifically, what are your goals/purposes: to reward an exiting employee for tenure and/or quality of service, to prevent a lawsuit or complaint from being filed, to protect the confidentiality of company secrets and information, to prevent an employee from competing with them, or a combination of the aforementioned?

Businesses often ask:
• Should we offer severance to an exiting employee?
• When should we offer it?
• How much should we offer?
• Are the terms negotiable?
• Should we ask an exiting employee to sign a separation agreement that includes noncompete and confidentiality clauses?
• What about protected class considerations (e.g., race, sex, age, disability, etc.)?
• What will my other employees or competitors think if they find out that an employee signed such an agreement or received severance?

In order to help the employer focus on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. If an employer believes that an employee will sue or complain to a regulatory agency, then a separation agreement should be strongly considered. If a lawsuit, complaint or any other factors of the employee's exit isn't a concern, then a severance or separation agreement or even no action might be appropriate.

Keep in mind, that unless there's a contract or agreement to the contrary, or obligations under the Worker Adjustment Retraining & Notification Act (WARN), severance isn't necessarily required, and in many instances an employee can just leave.

Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they're setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it's not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there's a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.

One way of reaching a bottom line for these agreements is that an employer should not enter into an agreement with an employee, and have to engage an attorney, unless the employer is reasonably sure that they'll obtain a benefit from the transaction that they wouldn't get in the normal course of business. Ultimately, as with most business decisions, whether to utilize an agreement or not is a cost versus benefit analysis.

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Article Tags: adea, age discrimination in employment, age discrimination in employment act, benefit, bonus, discrimination in employment, legal counsel, money, older workers, protection act, regulatory agency, section 201, separation agreement, separation agreements, seven days, severance agreement, signature



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