Employment Severance Agreement Explained: Whether or not you use an employment attorney to review and negotiate your employment severance agreement, you need to know the mechanics of the agreement. The following episode will go in depth and explain the legal terms in an understandable way.
Generally, all severance agreements accomplish one task, paying employees to release their claims against the company in exchange for money and confidentiality. Mark has seen thousands of these agreements in his twenty-five years of practicing employment law for employees and executives. They are all relatively the same in the terms, but differ in their layout. Most law firms use the same template, so Mark sees the same agreement used over and over again.
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Whether or not you use an employment attorney to review and negotiate your employment severance agreement, you need to know the mechanics of the agreement. The following discussion will go in depth and explain the legal terms in an understandable way. If you need further information on severance negotiations, we have written about severance agreements and negotiations in previous articles, read HERE and HERE.
Generally, all severance agreements accomplish one task, paying employees to release their claims against the company in exchange for money and confidentiality. I have seen thousands of these agreements in my twenty-five years of practicing employment law for employees and executives. They are all relatively the same in the terms, but differ in their layout. Most law firms use the same template, so I see the same agreement used over and over again.
The Intro Paragraphs
The initial paragraphs of every severance agreement identify the parties to the agreement and include a couple of “Whereas” paragraphs. The “Whereas” paragraphs are prefatory and not required in any agreement. I usually strike them as irrelevant.
The Non-Admission Provision
Every severance agreement includes a provision that the employer is not making an admission of wrongdoing, even though the employer’s actions were objectively discriminatory or wrongful. A non-admission provision is standard, but to the newly terminated employee, this provision seems awkwardly strange given the employee’s experience leading up to the termination.
The “Show Me the Money” Consideration Provision
Consideration or aka the payment provision. Well, for employees this is the most important provision in the agreement—what they will be paid to release their valid claims against their employer. It is important to consider the following structure when drafting the consideration or payment provision. First, all money paid to an employee to settle an employment case is taxable as income. Second, you can split the settlement payment into parts to take advantage of tax planning. The employer will also like this option too, as they pay less in FICA. We normally allocate 60% as 1099 income and 40% as W-2 income. This allows you to receive a larger lump sum as less taxes are deducted. The employer will require you to indemnify the employer if and when the IRS challenges the settlement agreement Form 1099 payments. In reality, I have never seen nor heard of the IRS conducting audits on client settlement agreements.
Attorneys’ Fees are Tax Deductible Against Gross Income
Remember, if you spent hard earned income on attorneys’ fees pursuing employment discrimination claims only and you received a judgment or a settlement in your favor, you can deduct the total amount of the attorneys’ fees against your gross income on your Form 1040. You can only take this deduction for the year in which the case settled or judgment occurred. See the attached link below. This is a crucial element to your decision to accept settlement, as most employers refuse to pay for your legal fees to get to a settlement. You are not alone if you never knew about this important IRS regulation. We regularly advise clients about this deduction, but it is recommended you speak to an accountant for tax advice. https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/can-i-deduct-legal-fees-on-my-taxes/L98fUeOrM
General Release of All Claims
When employers pay severance in exchange for a signed release, the general release provision is the primary provision most employers are concerned about. This provision effectively identifies every conceivable claim, known or unknown, that the employee has and then causes the employee to waive all such claims. Most severance agreements set forth a long laundry list of state and federal statutes the employee is agreeing to waive claims under. However, some claims can never be released in a written severance agreement, as state and federal laws prohibit such waiver of claims. For example, you cannot waive and release the following claims: (1) workers compensation; (2) unemployment insurance claims and (3) claims made to any self-regulatory government agency such as the Securities & Exchange Commission (SEC).
Challenge to Agreement or Enforceability
Most severance agreements contain a provision that if you seek to challenge the enforceability of the agreement, you have to return the money. That seems fair and it is. But some employers also sneak in penalty provisions in case the employee breaches the agreement for speaking out about the settlement etc. Employers often seek the total value of the settlement or some six figure amount to protect the employers in case the departing employee goes rogue and publicly denounces the employer on social media platforms. This penalty provision often shows up in cases where there is a lot of bad blood spilt between the parties, particularly after a lawsuit is filed. We strongly advise clients against these draconian provisions and inform employers they are overreaching and are already protected by non-disparagement clauses and employee confidentiality agreements previously signed at the start of employment.
No Other Amounts Are Due
Employers often place a redundant provision in the agreement that the company does not owe the employee anything more. I say redundant because the release provision should have covered every claim under the sun.
Every severance agreement contains a non-disparagement clause, but one only applicable to the employee and not the employer. We advise clients to include a mutual non-disparagement clause to be signed by the employer so it does not engage in blacklisting, which is a very real phenomenon. You will need to name specific individuals and managers when negotiating a mutual provision, as employers object to having to police their entire workforce. I personally never liked that response, but hey, these are called negotiations for a reason—you don’t get all the things you want and must compromise or litigate.
References and Employment Verification
Contrary to urban legend, employers do not provide references to departing employees. What they do provide is a 1-800 number to confirm your employment and title, but nothing more. If you have a good reference still within the company, I suggest you get that in writing or have the person contact your new employer directly.
No Future Employment
Most if not all severance agreements contain a provision that bars you from obtaining employment with the company, or its’ subsidiaries, in the future. Yes, this is perfectly legal. What the provision really accomplishes is that it prevents future liability by the company in the event you re-apply for a position and claim you were somehow discriminated against for a failure to hire. If you asserted claims against the company prior to termination or thereafter, be reasonable with yourself and do not expect the company will want to rehire you. Consider yourself “canceled” by your old employer.
Return of Company Property
Severance agreements require you to return company property upon your termination or before you receive your severance payment. You would be surprised by the number of times I have had to explain what is and is not company property to former or departing employees. I often use the example of company email; you know the one containing your corporate email address. Well, the email and the piece of paper it is printed on do not belong to you. So if an email does not belong to you, everything else the employer gave you to do your job also does not belong to you. My biggest concern arises when the employee tells me he wants to hold onto the hard drive he purchased that contains the company email list, client list, power point presentations and any other corporate proprietary information. All of the above company property must be returned to the employer or you risk getting sued for theft, conversion of property etc. and risk breaching your severance agreement and returning the money paid to you under that agreement.
Entire Agreement or Full Integration Provision
This is a standard term in all well drafted employment agreements, including severance agreements. Essentially, the only terms of the agreement are those terms set forth in the severance agreement. Any oral or written agreements made prior to the full execution of the severance agreement are nonbinding and unenforceable. So be careful in your review of your case so that you do not hold expectations that are not realistic. You would need to have an employment attorney evaluate a prior oral agreement to determine if it is viable prior to signing the severance agreement. Some employers have promised severance prior to the severance agreement but then walked back those promises. Again, an employment attorney can help you dissect this important legal issue. You may discover that your employer created a severance plan of one person—you.
Non-competition and Non-solicitation Provisions
We often see employers sneaking into severance agreements brand new non-competition and non-solicitation provisions where none previously existed during the employee’s employment. We advise clients to strike these provisions and most employers do not raise the subject again. As employment lawyers, we see this tactic used every day, but you do not. This is one example where you should involve an employment attorney to review your agreement, whether helping to negotiate it with the employer or from behind the scenes. We also see employers reaffirming the prior noncompetition and non-solicitation provision signed at the start of employment into the severance agreement. Again, we advise clients to challenge the inclusion and enforceability of these restrictive covenants. Most employers will back away once they are met with a good argument as to why the prior agreements are unenforceable.
Agreement Signed In Counterparts
It is common to include a provision that the parties to a severance agreement can sign in separate counterpart copies, each of which will be considered one fully executed agreement. Counterparts are exchanged via email and facsimile, as well as in person.
21 Days to Sign or Else
Don’t panic if you have not signed your agreement within the 21 days, as spelled out in the “proposed” agreement. There is no state or federal law that states you have 21 days or 45 days to sign the severance agreement. If the agreement is not signed by you, do you think you have an enforceable contract? No. So, ignore the 21 or 45 day threat and just speak with an employment attorney to discover what claims or leverage you have to increase the severance amount. Often times, consulting with an employment attorney will pay off in huge dividends to you in the form of a much higher settlement value at the conclusion of the negotiations. The difference or delta here is the employment attorney. She or he has the professional experience you lack, and it is that experience and knowledge of the law that is applied to your narrative to develop claims that stick against your employer. As you read above, your legal fees are 100% tax deductible, so why wouldn’t you explore your potential claims with an employment attorney?
I saved the best for last. Of course everyone knows that you give up your legal rights in a severance agreement, but many do not know you also agree to a “lifetime” of silence. No, you cannot write a book about your horrible employer if you agree to take their blood money! But the reason why I saved this topic for last is because of recent social and legal developments. The #metoo event and the aftermath that followed brought with it a new understanding about confidentiality agreements, also called nondisclosure agreements (NDAs). The social issue that has arisen is that we are no longer comfortable letting the bad actors of the world get away with their misdeeds, in particular any misdeed of a sexual nature—regardless of gender or sexual orientation, by covering them up with confidential settlement agreements. Think of Harvey Weinstein or the former Met Opera conductor James Levine. For decades and continuing today, every single employer requires the departing employee sign a confidentiality provision in a severance agreement in exchange for severance payments. This is the default rule followed by all employers. This default rule has only caused more employees to be harmed by the same bad actors who caused the previous cases that eventually settled.
Many states like New York have created statutes requiring a voluntary confidentiality agreement, separate and apart from the settlement agreement. While this sounds like a good idea, it has already been abused by employers. Most employers will now apportion a part of the settlement payment to be exchanged for a signed confidentiality agreement. Simply, the legislators were lobbied by employers and should have banned the use of settlement dollars in exchange for signed confidentiality agreements.
The bottom line for you is this. We are just not at the social pivot point for you to resist the use of confidentiality provisions in settlement agreements, so don’t waste your time arguing about this issue with your former employer. But one day confidentiality provisions in employee severance agreements will be banned as a matter of statute and public policy. This is a nonpolitical issues, as both liberals and conservatives use confidentiality agreements to conceal the illegal misdeeds of their managers and employees.
In an often-quoted line from the hit TV series Dexter, actor Michael C. Hall, who plays the title character said: “There are no secrets in life; just hidden truths that lie beneath the surface.” For those of us involved in the resolution of employment claims on behalf of employees, this quote has special meaning. Beneath the surface of most employment settlement agreements lie the undisclosed facts that led to the conflict and which often result in the messy end of an employment relationship. Recently proposed legislation in California seeks to ensure that those “hidden truths” do not remain hidden.
California Proposes New Law – Silence No More Act (SNM Act)
A new law proposed in California this week called the Silenced No More Act (SNM Act) is intended to prevent the enforcement of non-disclosure provisions in a wide variety of employment settlement agreements. The legislation, proposed by California State Senator Connie M. Leyva, will expand upon the 2018 STAND Act (Stand Together Against Non Disclosure) and will protect plaintiffs in cases of employment discrimination and harassment of all kinds who choose to speak out publicly about their experiences. Under the current provisions of the STAND Act, only plaintiffs in cases of gender discrimination or sexual harassment may avoid non-disclosure provisions. The new law will expand the STAND Act to prevent the use of non-disclosure provisions in employee severance agreements. Under the SNM Act, targets of discrimination based on race, national origin, religion, or gender identity will also now be free to ignore the contractual gag orders companies negotiate into their settlement agreements.
This legislation has been supported by employee rights groups in California including the California Employment Lawyer’s Association and the Equal Rights Advocates. The new laws are seen as an end to the days when employer misconduct can be hidden from public view. Workers who have been targeted with harassment and discrimination will be free to speak their truth publicly. The perpetrators of this type of misconduct can no longer hide behind the veil of secrecy provided by their company. Non-disclosure and non-disparagement agreements will no longer be used to silence employees. The hope is that the public disclosure of the details of these abusive work environments will prevent perpetrators from targeting other workers in the future.
STAND and SNM Could Influence Other States to Pass Similar Laws
Although STAND and SNM (if it is enacted) are or would be exclusively California laws, these statutes could ultimately have a broad national impact. Other states often follow California’s lead in employment matters. Further, the fact that so many large technology companies are headquartered in California gives these laws an outsized influence on the national conversation about non-disclosure agreements. In the wake of the STAND Act, a number of states have enacted some limitations on non-disclosure enforcement including Washington, New York, New Jersey, Vermont and Tennessee. Many more states are likely to see some version of this legislation in the future.
More Cow Bell – More Corporate Disclosure and Shaming = More Equality in the Workplace
As am employment attorney, I was very curious about how this new legislation might impact the ability of plaintiff’s lawyers to negotiate settlements for clients in employment discrimination cases. Often the best leverage plaintiffs have in the early stages of an employment case is the prospect of public disclosure of misconduct on the part of a company employee or manager. The reason many companies offer settlements to claimants is to avoid embarrassing public disclosures of uncomfortable truths about their corporate culture or work environment. Companies also have an interest in keeping settlements secret to avoid what they see as “encouraging” other claimants looking to “cash in” on potential claims. In other words, the concern is that the non-disclosure and non-disparagement provisions outlawed by the STAND Act and the SNM Act are the best tools to obtain fair settlements for employees who have been targeted with harassment or discrimination.
The STAND Caveat
Further examination of the proposed statute reveals that its scope is more limited than I had anticipated. These statutes are actually structured to encourage and not to discourage early settlement of discrimination cases. The STAND Act allows for use and enforcement of NDAs (non-disclosure agreements) in cases where there has not yet been any court or agency filings. So during the initial stage of the claim, when a demand letter has been issued but where claims have not yet been filed with state or federal human rights agencies (such as the Equal Employment Opportunities Commission or “EEOC” in federal discrimination cases or the Connecticut Commission on Human Rights and Opportunities or “CHRO” in Connecticut state discrimination cases) and no lawsuit had been filed, the companies may include NDAs in settlement agreements and they are enforceable.
This exception to the ban on NDAs is highly significant. Far from discouraging early settlements of discrimination claims, this feature of the proposed law offers employers a powerful incentive to settle employment discrimination and harassment claims early. If an early settlement is not reached then the agency filings will occur and the employer will lose the right to demand an NDA as part of the settlement agreement. In order to keep employee misconduct secret, employers will have to settle employment discrimination cases early and often. While some cases can be kept secret by early settlement negotiations, targets of discrimination who want to shed light on their experience can ensure their ability to speak out by filing their claims with state and federal agencies.
What Opponents/Management/Defense Attorneys Say About Anti-NDA Legislation
Opponents of the anti-NDA legislation contend that restricting NDAs takes away a survivor’s choice to keep their case private and provides a strong incentive for employers to refuse settlement options and to defend themselves against a publicly disclosed allegation. According to Attorney Jill Basinger, an entertainment litigation partner and Michael L. Smith an associate at Glaser Weil in Los Angeles, “This harms survivors of sexual harassment and assault by removing their choice and forcing them to endure the hardship and uncertainty of a public trial as the only means of vindicating their claims.” Once an agency filing occurs or a lawsuit is commenced, the NDAs become unenforceable. It seems as if these laws would remove a strong incentive for defendant employers to settle claims.
It appears, however, as if the STAND Act has resulted in an increase in pre-filing mediations in employment cases in California. According to Mariko Yoshihara, the Legislative Counsel and Policy Director for the California Employment Lawyer’s Association, the predictions and fears over the STAND Act impairing the ability to settle have not borne out. According to Attorney Yoshihara, attorneys involved in this type of litigation have informally reported that the legislation has not lowered settlement amounts or impaired the settlement process. Additionally, according to Yoshihara, it has made it easier to advocate for employee rights from a public policy perspective because the targets of harassment and discrimination can make their stories public. While dispositive data on this point is not yet available, it seems as if the legislation is working in California.
Further, fears surrounding the forced public disclosure of the identity of the claimant are unfounded. Under the STAND Act there are specific provisions which protect the identity of the complaining employee in the context of a lawsuit. The STAND Act includes a specific provision that shields the identity of the claimant and all facts that could lead to the discovery of his or her identity, including documents and pleadings filed in court, at the request of the claimant. California Code of Civil Procedure 1001(c). Thus, the anti-NDA legislation does not force the disclosure of a claimant’s identity.
While many employer advocacy groups including various chambers of commerce and industry and trade associations have opposed legislation such as STAND and SNM, similar legislation should be considered by all state legislatures that have not already enacted similar laws. When it comes to use of NDAs in employment discrimination and sexual harassment cases there is an unfair imbalance of power between the bargaining parties. The employers who are often defending the harasser or denying that the harassment occurred have an overwhelming advantage over the complaining employee in terms of investigative, legal, personnel, and financial resources. Employers are frequently holding all of the cards in a settlement negotiation. Legislation such as STAND and SNM will help to level the playing field at least with respect to NDAs.
More Power to the People/Employees – Shift In the Balance of Power
Placing the power over which aspects of the case can or will be made public in the hands of the targets of harassment and discrimination will help balance the power in the arena of employment settlement agreements. As evidenced by the initial success of the STAND Act, these laws can be an important tool in ending the culture of silence that has permitted harassing and discriminatory behavior to continue in the workplace for so long. In a recent opinion piece, the feminist writer and critic Marcie Bianco said: “If the societal change necessary for dignity and justice is to occur, we must move from awareness to accountability.” This legislation should help bridge the gap between awareness and accountability. We need to see a whole lot more of those “hidden truths” lying beneath the surface of the American workplace.
 Basinger, Jill and Smith, Michael L.; “How California’s NDA Restrictions Cause More Harm Than Good for Survivors” (Guest Column); Hollywood Reporter; https://www.hollywoodreporter.com/news/how-californias-nda-restrictions-cause-more-harm-good-survivors-guest-column-1280922
 LeHocky, Mark, “Shining a Needed Light on Harassment and Discrimination Claims: The Collective Benefits from California’s Recent Secret Settlement Restrictions”, Contra Costa County Bar Association, March 2020; https://www.cccba.org/article/shining-a-needed-light-on-harassment-and-discrimination-claims/
 Bianco, Marcie, “Britney fans angry at Justin Timberlake have a point.”CNN Opinion, February 10, 2021.
Most at-will employees who have been recently terminated are given a “Separation” or “Severance” offer from their (now) former employer, in the form of a contract (or packet). This post is intended to give you a few pointers of what to look out for in such agreements.
Remember – this is not legal advice for the individual! This is just a general guide for common issues we encounter. If you have any specific questions about your own separation contract, please call us!
1. Think of your separation/severance offer as a negotiation.
Most employees are not entitled to severance. There is no such thing as legally required “two weeks” pay or anything like that. However, most of the time employers offer terminated employees severance anyway.
Why do they do this? Because they want you to sign a legal release, which is a contractual agreement that you are waiving any rights or grounds you might have to bring a lawsuit against your employer. Your separation/severance packet is this legal release.
So, what does this mean? It means they are offering you something because they want you to sign that release. This is a tit-for-tat. Don’t be afraid to ask for more before you sign.
2. Review what you are being offered – usually money.
As noted, often at-will employees are not legally entitled to a specific amount of severance from their employer. The first element you should think about, before you sign, is whether they are offering you enough in exchange for what they want from you – that legal release.
There might also be other components in your separation/ severance offer, such as continuation of health care or other benefits, or stock vesting. Start by reviewing your agreement carefully to see what they are offering you.
3. Confirm that you are being offered everything you are entitled to.
Review your employee handbook and any other documents you signed at any point during your employment, whether when you first started or while you worked there.
You are always entitled to be paid out for any accrued sick time, vacation time, or any other form of PTO your company offers. You are also entitled to any earned wages, typically referred to as your “last paycheck.” You must be paid for all this time by your next usual pay period.
Review your documents to confirm whether there are any contractual or established policies regarding termination, separation, or severance. For example, your employer might be required to provide you with a notice period before they can terminate you. This might be days, weeks, or months. A notice period could be detailed in your individual employment documents, or in your company’s general documents, such as the employee handbook.
4. Ask for a copy of your personnel file – you are legally entitled to it.
All you need to do is send an email. It could be to HR or your own supervisor. Your personnel file will contain all of the documents you signed with your employer, so this can be particularly useful when you have been employed for a while and can’t remember if you kept copies of everything.
5. Confirm whether you have an ERISA group benefits plan which could include severance benefits.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry. Sometimes employers also utilize ERISA plans for severance benefits.
If you are unsure, ask your employer and there is also a free website where you can search for your company name – https://freeerisa.benefitspro.com . You have to make an account, but it is actually free.
6. Consider whether you might have any legal claims against your employer.
If you have a valid legal claim against your employer, this is a huge source of leverage as you negotiate your separation/ severance offer.
Remember, (most of the time) this is a pretty simple exchange. They are offering you something (usually money) in exchange for your agreement to drop any potential legal claims you might have, even if you don’t have any. This boils down to mean that they are potentially offering you free money in exchange for nothing if you have no legal claims. Employers do this simply for peace of mind (and sometimes for reputational reasons in the industry).
If you do have a legal claim, that can be a game-changer in a separation negotiation. At that point, you have to consider the elements on a scale – the value of your legal claim on one side, against the value of the legal release your employer wants, on the other side. Bottom line, it means your company might be willing to offer you much more separation/ severance pay in exchange for you signing the legal release.
If you think you might have a claim, we encourage you to call us to discuss.
7. Request to be released from any non-compete, non-solicit, or other restrictive covenants (if any apply to you).
If you are subject to any type of non-compete, non-solicit, or other restrictive covenants, now is the time to request to be released. Remember – these are simply contractual agreements, and your employer can agree to release you at any time. Even if your employer is not legally required to release you, they are often willing to discuss the option, and/or might agree to reduce the restrictiveness of such covenants. This is part of the negotiation.
Even if such covenants are not spelled out in your separation/ severance offer – they might still apply to you if your separation/ severance offer “incorporates by reference” a prior contract. Sometimes, if an employee signed a non-compete while they were employed, the separation/ severance offer might say something like “Employee agrees that Employee’s Employment Agreement is expressly incorporated by reference into this Agreement as if set forth fully herein.” This means that every single restriction in your employment agreement still applies to you, even after you sign the new separation/ severance offer. Be aware.
8. Review non-disparagement provisions and ask that they likewise protect you.
Many separation/ severance offers contain non-disparagement clauses, which will say something along the lines of “employee agrees not to make any statements which disparage the company or are in any way harmful to the reputation of the company.” These provisions are very broad and much more broad than the legal definitions of defamation or slander. A single angry comment on Facebook, for example, could be a violation of this provision. If you sign an agreement that contains this, be aware that you should avoid any negative commentary about your former employer, including online.
Likewise, you can ask for the same protection for yourself – that the employer commits not to make any disparaging, damaging, or negative statements about you in the future. Again, don’t be afraid to negotiate.
9. Control your future reference.
Similar to non-disparagement, you also have the option to ask for language which will control what your now former employer can say about you when you need future potential employers to call them for a reference. The exact language is up to you, but we often request a provision that will only allow the employer to confirm your dates of employment, and position or title held. You can agree or not agree to allow the former employer to give out your salary information.
10. Arbitration clauses.
Many separation/severance offers include a clause which states that any dispute under the agreement must be brought in arbitration. Like the rest of the provisions, it is ultimately up to you what you are willing to sign, but we typically encourage clients to fight against these provisions. It can be counter-intuitive, but if a dispute arises, our experience has demonstrated that employees can often have much more leverage without arbitration restrictions.
For more information about this article, please contact our employment attorneys at Carey & Associates, P.C. at firstname.lastname@example.org or call 203-255-4150.
5 Essential Things To Know About Severance Agreements
1. Every Severance Agreement Must be Negotiated
A severance agreement is NOT an agreement until you sign on the dotted line. Until then, it is a severance OFFER. And as with all offers, it can be negotiated. If you are presented with a severance offer at work, either at the start of or upon separating from your employment, it is crucial that you have an employment attorney weigh in. The language in the agreement is just as, if not more, important than the severance dollar amount being offered to you. But both the dollar amount and covenants therein can be and should be reviewed and negotiated so that the agreement is as optimal as possible for you. Because Connecticut is an “at will” employment state, employers can terminate you for any reason or for no reason (as long as it is not an unlawful reason) and they are under no obligation to provide you with any severance (unless they have an express written severance policy or agreement with you already in place). Knowing this, if an employer first presents you with a severance offer at the time of your departure, it usually means they want something significant in return from you, such as a full general release or a non-compete. That is where the leverage for you to negotiate certain elements of the agreement, including, but not limited to the amount of severance money on the table comes into play.
Bottom line: Severance agreements are not take it or leave it offers, but can be and should be negotiated in order to best protect you and compensate you for your loss of job.
2. Resist Signing the Severance Agreement and Speak To An Employment Attorney
A severance agreement can be a springboard to a settlement agreement with your former employer. Although when first presented to you, a severance agreement is designed in theory to essentially compensate you for any gap in income between your prior job and your next job, it can also serve as a settlement agreement to compensate you for claims that you might have related to an unlawful or improper termination. Although Connecticut is an “at will” employment state and your employer can terminate you without cause, the employer is NOT permitted to terminate you for an unlawful cause such as discrimination or retaliation, or for a breach of an employment contract that provides a certain duration of employment or that spells out certain circumstances under which you may or may not be terminated from your employment. If you believe that your termination was in some way improper or unlawful, then it is important to immediately speak to an employment attorney. It is often the case that with a skilled employment attorney taking the reins, your severance offer can be negotiated into a settlement offer that will compensate you for your legal claims. In many instances, where there are valid legal claims underlying a wrongful termination. We are successful in reaching settlements for our clients during the severance review period, which translates into settlement dollars that exceed the measly severance offer first presented to you.
Bottom line: If you believe your termination was motivated by discrimination or retaliation, or other improper acts, do not rush into signing a severance agreement and seek out an employment lawyer to understand your options for pursuing a settlement or litigation to recover all damages available to you for your legal claims.
3. Know What You Are Getting (Golden Handcuffs) for The Severance Money
Whether you are about to enter into a settlement or a severance agreement, you must understand that this is a quid pro quo and that any monies being offered to you do not come freely. In return for a settlement or severance pay out, you will be asked to agree to certain covenants, referred to as restrictive covenants. The restrictive covenant to be most mindful (SCARED) of is a non-compete. If you accept the settlement or severance offer and execute the agreement with your former employer, you will be bound by all of the terms of the agreement and any breach of any term in the agreement is a breach of contract. As such, if there is a breach, you would be subject to damages which might consist of having to return the severance or settlement dollars or even to pay a pre-determined monetary penalty (known as liquidated damages). Therefore, it is crucial you understand what these covenants mean, how they restrict you and what you must do going forward in order to comply with the contract terms. Ideally, your agreement will not contain a non-compete and we take great efforts to remove those from our clients’ agreements or to narrow their scope and impact. But the first step is for you to be aware of and comprehend the relevant restrictive language. In essence, a non-compete will prohibit you from earning a living in the same field for a certain amount of time and usually within a certain geographic territory. This can be devastating and should be avoided at all costs. There are additional restrictive covenants such as non-solicitation, confidentiality and non-disparagement clauses, which too must be addressed and negotiated so that you are adequately protected from a potential breach down the line.
Bottom line: You must be very aware of what you are giving in return for the money you are getting and there are certain gives, such as a non-compete, that we negotiate and attempt to narrow or ideally remove from these agreements.
4. The Severance Agreement Must Contain Terms That Are Mutual to Both Parties
Confidentiality and disparagement are additional boiler plate clauses often added to these agreements and are almost always first presented as a unilateral restriction on the employee receiving the settlement or severance pay out. However, that does not need to be the case. We are extremely successful in getting these particular covenants to be mutual. In other words, if the agreement requires that you keep certain information concerning your separation from your employer quiet and confidential, including the existence and terms of the agreement itself, it only seems fair that your employer be bound by the same confidentiality requirements. Likewise, if you are being directed not to disparage your former employer, wouldn’t you want your employer to be held to the same standards and to be bound to not disparage you to others and to the public. We have also in many cases negotiated certain language into these agreements that specifically prohibits certain named employees at your former employment from disparaging you, for example your supervisor or manager with whom you might have had a less than amicable professional relationship with and because of whom you might have actually been terminated.
Bottom line: Certain clauses that are initially included as unilateral in a severance agreement can and should be made mutual so that you are just as protected as your former employer after you both have parted ways.
5. Severance Should Always Be Paid Out Up Front in a Lump Sum
Severance will often be offered to you as a payout over a period of time (usually in monthly increments and in coordination with your employer’s regular payroll schedule.) However, severance, like a settlement offer, can be and should be a lump sum. There is no rule that says employers must pay it out to you as they would with your regular paychecks, even though such payments are often considered income and taxed as such. Don’t forget you are no longer employed there, and you are no longer on their payroll. So, any argument they make to pay you as “payroll” is disingenuous and only serves their benefit. In that you will likely be signing a release of all future claims against your employer as well as possibly agreeing to other restrictive covenants described above, in return for the severance payment, you should have the upper hand in the arrangements regarding that payment. Not only is it optimal financially for you to have your severance money paid up front and in a lump sum, but it is optimal from an exposure standpoint. For one, you might not know how financially sound or healthy your employer is. After all, they are terminating employees, which could be a sign that business is bad. Therefore, it is prudent to get your severance dollars up front and in full if possible, in order to avoid any potential inability of them to pay out their remaining obligations. In addition, because any agreement will bind you to comply with the contract terms, where there is a payout arrangement, employers have more leverage to withhold payments to you under the notion that there has been some alleged breach of the contract terms. Lastly, where there is no express severance policy or agreement already in place, there are no hard and fast rules about how much severance you are entitled to. While many employers attempt to correlate your severance payment to how long you have worked there, or to have it reflect a certain number of weeks’ pay for each year you were employed, this is all arbitrary and as a result, usually negotiable.
Bottom line: Severance is not payroll and should be paid to you up front as a lump sum, taking into account not just how long you have been there, but all of the circumstances surrounding your departure, including whether you have potential legal claims and what they are asking you to agree to in return.
ULTIMATE BOTTOM LINE: If you have been presented with a severance agreement/severance policy either at the outset of your employment, during your employment, or at the time of your termination, please do not sign until you have consulted with an employment attorney. We are happy to help you in this situation and we can be retained on a limited hourly basis to guide you through this stressful process.
5 Essential Things To Know About Severance Agreements. Feel free to contact us at any time or call 203-255-4150 or email at email@example.com.