How Do Severance Agreements Work?
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As noted in the video, this educational material is not intended as legal advice, nor does it create an attorney client relationship with our firm. If you want legal advice for your specific matter, we recommend scheduling a consult with one of our attorneys.
Feel free to navigate the video with the time codes provided by each section.
Overview of Severance Agreements (2:28)
- The Terms “Severance” and “Separation” Agreement are used interchangeably. It’s a contract between you and your former employer, where you release your right to sue them in exchange for something – usually money or a non-monetary benefit, like a positive reference.
- Key question: how long do I have to consider this? It depends – the document itself might set a timeline.
- If you are over 40 years old you are covered by the Older Worker Benefits Protection Act, which mandates that you have 21 days to consider the agreement and 7 days after signing to rescind if the agreement if it asks you to waive the right to sue for age discrimination (something almost all of them do)
- Even if you are under 40, most companies will give you time to consider the agreement because they don’t want you to have an argument that you were coerced into signing
- You may be in a situation where you are prompted to sign the agreement immediately. You should say to whomever is in the room that you want to take time to consider it, take it home and think about it. Most times they will allow that – very rarely will an employer not allow you to do this, though it is legal to do if the employee is under 40.
Sample Severance Agreement (5:56)
- As this is a sample agreement not every agreement will necessarily be in this order.
Severance pay (8:07)
- One form is payment for time through normal payroll (as if you were working) though it can be paid in other manners such as a lump sum not through payroll.
- Often applies in high-level positions; an employee may be kept on the payroll even though they are not expected to come in to work, though the company will reserve the right to contact and request information from the employee for the purposes of the transition.
- Pay attention to the Healthcare benefits portion
- In this example the employer will continue to pay the insurance for a set number of days, after which the employee will retain coverage for a set period of months through COBRA (though the employer will not be paying its portion it so it may be expensive)
- Note that this is also negotiable
- Question: what is required for them to pay me? Under most circumstances there is no requirement to pay anything. For high-level positions there are typically contractual agreements (only invalid unless fired for causes such as stealing) where the company agrees to pay a set amount as severance, but very few people get that. Rule of thumb is one week per every year of work – not required by law
- PTO being paid during severance is not usually governed by law and is usually dependent on the company policy, usually located in the employee handbook.
- In most states, unless you were fired for cause, then you have a right to unemployment insurance. Companies can agree in a severance agreement to not contest the application.
Company Property (13:30)
- Companies have a right to request return of company property and sometimes access to personal devices (phones, laptops) to remove company data.
Don’t give companies anything that might be used against you, such as destroying property. Companies can use forensic analysis to see documents and information downloaded.
- Asks you to agree that no laws were violated, i.e. that they are not having you sign this agreement because there was any wrongdoing on the part of the company.
General and Specific releases (15:52)
- You agree to release all of the claims that you have to sue the company for any reason. They will mention federal and state statutes. Unless you are covered by the Older Worker Benefits Protection Act, once you sign this you are giving up your right to sue for any reason.
- This is one area where it is difficult to tell how fair it is just looking at the writing: you need to know if you are being compensated fairly and to know what your rights are.
- Example: You complain about sexual harassment and are fired. You are offered a severance agreement with two weeks pay to waive your claims. This is not a particularly good or fair deal.
- If you have questions, it may be worth hiring a lawyer or getting a consult to see if you have a case. By signing, you give up rights to sue under most laws.
- It is rare that there is not this kind of language, though it does happen. In that case, it is perfectly legal to sign, take the money and then sue the employer.
- You can’t be forced to give up whistleblower claims or give up your right to file a charge at the EEOC, but you can be forced to waive your right to compensation.
- This is the part that you generally need an attorney to determine if the company is compensating you adequately for giving up your right to sue. You need to know how strong your claims are. Of course, if you do not believe you have any claims against the company, this section may not be very important to you.
Mutual Release (21:29)
- You are giving up the right to sue its company or its subsidiaries, (as well as giving up transferring your claims to your heirs should you die) and the company agrees not to sue you
- This doesn’t come up often – that a company will sue you – though it’s better to have than not.
- Typically includes a portion where you agree to dismiss any ongoing claims.
- You may want to have a lawyer review this if you are in a class action or similar suit, as signing may mean you agree to dismiss that claim.
Nondisclosure/Confidentiality Agreements (23:36)
- You agree not to discuss this settlement publicly or with anyone except an attorney or an accountant
- Sometimes includes stipulations that the attorney and accountant need to agree to be bound by these provisions
- You are giving up your right to talk about what happened at work. This does not apply in cases like being subpoenaed in another case. However, talking about the matter in public is prohibited. Just be careful when and how you talk about this to avoid getting in legal trouble because companies will enforce this.
- Liquidated damage agreements are terms that can potentially be in a contract that means that the company doesn’t have to prove that it has been damaged to receive compensation by violating the NDA. Otherwise the company would need to show damages.
- Typically, you want to try to make this mutual, including something like a positive or neutral reference.
Non-Disparagement Clause (27:45)
- This simply means that you can’t badmouth the employer. This can be negotiated to be mutual as well.
- Sometimes the company will not agree to a blanket non-disparagement agreement but will often agree to a non-disparagement agreement from your management and coworkers
- Note that these things don’t mean that you can’t talk about your job, duties or salary, merely the terms outlined in the agreement.
- Be aware of this and consider hiring a lawyer if you are concerned
- Says that you agree to not steal company employees or clients, or try to influence other employees to leave with you
- Typically comes up if you are leaving for a similar company that doesn’t fall under the non-compete
- More prevalent in sales or if you are opening up a new business
- This can be negotiated, including the timeline for the non-solicitation.
Merger Clause (32:26)
- Everything that is agreed to is in this document.
- In other words, if it isn’t in the document, the company is not bound to it. If there is something important to you for this agreement, make sure that it is included in the document.
Attorney’s Fees (33:44)
- If there is a fight over this document, often what is part of the signed agreement is that, should you sue and lose, you will need to pay the attorney’s fees for both sets of attorneys – yours and the company’s.
- Typically advised to negotiate both sides bearing their own attorney’s fees to allow both sides to pay their own legal fees rather than the losing side paying both, especially if it is highly contentious.
Governing Law (35:54)
- You can agree by law where a potential legal dispute is fought and what law applies.
- Example: a dispute can be fought in the Virginia courts but use Delaware State law. Some state laws tend to be better for certain claims than others.
- This can be negotiated, but it isn’t worth it often
- If a court looks at this and doesn’t want to enforce part of the agreement, then the rest of the agreement is still valid.
Final Parts (39:13)
- Receipt acknowledges that you have received the document
- Counterparts means that you don’t have to have one document with both signatures; just a matter of convenience
Key Factors to Consider for a Severance Agreement (39:41)
- It is important to know if the Non-Compete or Non-Solicitation portion is important to you
- If you plan on working for another company or starting a business, one possibility is speaking to your employer about this before you leave; often these can get nasty when the company is surprised by it
- For this, it may be advisable to talk to a lawyer
- By signing you are releasing any claims you may have
- You are not bound by most parts of the agreement unless you sign. If the money is low and you are troubled by it, just turn it down.
What Will Not Be in the Severance Agreement (42:21)
- OWBPA (42:32)
- If there is a large reduction in the workforce, the employer will be obligated to provide you with a notification of the ages of the people that were let go. In the event of a larger reduction you will have 45 days to review and 7 days to rescind after signing.
- WARN Act (43:38)
- Applies to large-scale reduction in force, such as the closing of a plant
- Required to give a WARN act notice (generally 60 days, barring circumstances that would make that not possible)
- You can sue for failure to comply if you don’t get the notice
- Uniformed Services Employment and Reemployment Rights Act (USERRA) (44:37)
- Specific part that says if you are giving up the right to bring a claim under USERA, you have to specifically waive that, and the company has to specifically give you something above and beyond what is normal as compensation.
- Applies to uniformed service members
Should you negotiate a severance agreement? (45:58)
- This a contract negotiation – the offer remains open until they either take it back or you reject it.
- When making a counteroffer, by law, you have rejected the first offer and the company is not legally obligated to put that first offer back on the table.
- It is possible that by presenting a counteroffer, the company will completely remove the first offer, though this is not common.
- If you do want to negotiate you can either do it yourself or have a lawyer working behind the scenes. These agreements are not set in stone.
- When considering whether or not to negotiate, the company is getting something of value, namely release of potential claims and non-disparagement/non-disclosure agreements. These things are always up to negotiation, you don’t need to have legal claims against the company to negotiate.
- To get specific legal advice about your situation, hire a lawyer and know in many cases that you have time to consider the agreement.