122: Employee Severance Agreements

A release without a severance payment won’t hold any water.
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You have to provide “consideration” in exchange for your employee’s waiver of their rights to sue.

I was talking to a friend this weekend and she told me about a recent employee termination experience.

Her employee didn’t show up for work one day so so she called her. The employee said she didn’t want to work any longer due to health issues….a voluntary termination.

My friend paid out all the accrued earnings including sick and vacation time and had her employee sign a release form.

However, there was no severance payment made.

Before I continue, this is another one of those episode where I need to remind you that I’m not an attorney and I’m not providing legal advice.

So here is what you need to understand about releases.

Severance payments:

The release is really a severance agreement. They are also commonly referred to as a separation agreement or termination agreement. Whatever you call it, it’s a contract. This contact is a waiver of the employee’s right to sue.

A release without a severance payment won’t hold any water. In order for a contract to be valid there has to be an exchange of value. You have to provide “consideration” in exchange for your employee’s waiver of their rights to sue. That consideration is usually cash.

But what if your employee was already entitled to severance pay either by law or contract?

State law, an employment agreement, or even your employee handbook could obligate you to pay severance. If that’s the case, you’ll have to provide consideration above and beyond what that law or contract requires, in order for the severance agreement to be valid.

Yes… some states (or territories) require severance for termination without cause….like Puerto Rico, which requires you to pay a hefty severance package, even after the major labor law reforms earlier this year.

Puerto Rico is so wacky that I’m going to do episode 124 on their labor laws so be sure to catch that episode. Even if you don’t have employees in Puerto Rico, it will be interesting.

Clear language:

Your severance agreement needs to be well written. It doesn’t need to be long and complicated, in fact, it needs to be readable, understandable and clear to your employee. If the agreement is poorly written, you’ll be at a huge disadvantage, because the court is going to always give more weight to your employee’s arguments since they weren’t the ones to write it and they had the least bargaining power. If it’s confusing, then it’s open to interpretation, and the court will interpret it to your employee’s advantage.

The Equal Employment Opportunity Commission(“EEOC”) provides several examples of what a severance agreement looks like. They say that most employees don’t challenge their severance agreement. If your employee does end up filing a claim, they’ll have to get the court to declare the agreement invalid before they can proceed with the claim.

Voluntary consent:

Severance agreements are generally good if your employee knowingly and voluntarily consents. If they did and you are paying reasonable consideration and you’re not asking them to waive future rights, and the agreement doesn’t violate state and federal laws, you’ll be safe.

According to the EEOC, here is what the court is going to look at when deciding if the severance agreement is valid.

    • Whether the agreement is written clearly and specific enough for your employee to understand it based on their level of education and experience.
    • Whether you induced them by fraud, duress or undue influence to sign it.
    • Whether your employee had enough time to read and think about it before signing.
    • Whether they consulted an attorney or if you encouraged or discouraged them from getting legal advice.
    • Whether they had any input in the negotiating the terms of the agreement.
    • Whether you paid them enough for the waiver of their rights.

Here is an example:

An employee was informed that his company was downsizing and that he had 30 days to elect voluntary or involuntary separation. The employee chose voluntary separation in exchange for severance pay and additional retirement benefits and signed a waiver, which stated:  “I . . . hereby release and discharge [my employer] from any and all claims which I have or might have, arising out of or related to my employment or resignation or termination.”   The employee later filed suit alleging that he was terminated based on his race and national origin.

In finding that the employee’s waiver was not knowing and voluntary, a court noted that although the language of the agreement was “clear and unambiguous,” it failed to specifically mention the release of employment discrimination claims.  Because the employee was only high school educated and unfamiliar with the law, his argument that he believed he was only releasing claims arising from his voluntary termination and the benefits package he accepted was “not an unreasonable conclusion.”

Special ADEA requirements: 

If you want to be released from age discrimination clams under the Age Discrimination in Employment Act (“ADEA”), then you have an additional set of rules you need to follow.

These rules were baked into the Older Workers Benefit Protection Act (OWBPA) of 1990.

    • A waiver must specifically refer to rights or claims arising under the ADEA.  EEOC regulations specifically state that an OWBPA waiver must expressly spell out the Age Discrimination in Employment Act (ADEA) by name.
    • A waiver must advise the employee in writing to consult an attorney before accepting the agreement.
      A release stating: “I have had reasonable and sufficient time and opportunity to consult with an independent legal representative of my own choosing before signing this Complete Release of All Claims,” did not comply with OWBPA’s requirement that an individual be advised to consult with an attorney.  The agreement didn’t say “Get an attorney.”
    • A waiver must provide the employee with at least 21 days to consider the offer.  This 21-day consideration period runs from the date of your final offer.  If you make material changes to the final offer, then the 21-day period starts over.
    • A waiver must give an employee seven days to revoke his or her signature.  The seven-day revocation period cannot be changed or waived by either you or your employee… no exceptions.
    • A waiver must not include rights and claims that may arise after the date on which the waiver is executed.  This provision bars waiving rights regarding new acts of discrimination that occur after the date of signing, such as a claim that an employer retaliated against a former employee who filed a charge with the EEOC by giving an unfavorable reference to a prospective employer.

Also, don’t include restrictions that are unenforceable or excessive. Most of the time this happens with the confidentiality and non-compete terms within the severance agreement.

You should read the EEOC’s Employee Checklist, called “What to Do When Your Employer Offers You a Severance Agreement.. It’s a great reference, guide and reminder of the important elements you must have in your severance agreements.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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