Your company has been laying off a lot of people in your department lately, but you’ve been hoping that due to seniority and a stellar record, it might keep you on. Today, however, is your turn. After quietly advising you that your employment has been terminated, your boss says that the company is offering you a severance package if you sign an agreement that includes, among other things, a release of legal claims (that you have or may have against the company).
Severance Agreements Explained
A severance agreement is a contract between an employer and employee that documents each party’s rights and responsibilities in the event that the latter’s job ends due to layoffs, elimination of the position, or mutual agreement to part ways.
The Fair Labor Standards Act only requires an employer to pay a terminated employee their regular wages due to the final working day, plus any accrued time, unless an employment contract or published company policy obligates them to pay severance. Many employers, however, offer a severance agreement as a gesture of goodwill and, more importantly, to protect them against a future lawsuit.
So what constitutes a strong severance agreement? While every situation is different, the five elements below should definitely be included.
No. 1: Severance Pay Amount and Delivery
A severance payout enables an employee to sustain themselves and their families while they look for another job. The agreement must indicate the exact amount and delivery structure of the compensation. In other words, will the employee receive a lump sum or a series of payments over a fixed period?
No. 2: Health Insurance Extension
Although the Consolidated Omnibus Budget Reconciliation Act (COBRA) permits a temporary continuation of any health insurance policy that the employee had while working for the employer, some companies will pay for health coverage until the employee finds a new job. If the employer will also cover disability-income and life insurance during the same period, then the agreement should state the fact.
No. 3: Handling of References
References are often the bridge to a new employment opportunity, and should be a part of any fair severance agreement. A lot of businesses have a policy stating that they will only provide neutral references, which simply verify the former employee’s position and his/her tenure at the company. If the company offering the severance does not have such a policy, then the agreement should include a neutral reference clause to avoid future accusations of blackballing and support the employee’s future employment efforts.
No. 4: Non-Disparagement Guidelines
Non-disparagement clauses prohibit one party from speaking negatively about the other. In severance agreements, the clause should work both ways: the employer will not provide malicious answers to reference requests, for example, and the employee will not publicly “badmouth” the company.
One thing to remember: the EEOC and other government agencies have expressed concern that these clauses may illegally prevent employees from filing ‘disparaging’ but legitimate charges with them. The separation agreement should include an exception to filing such a complaint (assuming you haven’t released your right to make a claim against the employer).
No. 5: Confidentiality Clauses
It is reasonable for an employer to want its trade secrets, customer lists, and financial information to remain within the company. A confidentiality clause in the separation agreement will protect the business from being compromised by competitors and the employee from unwittingly saying something that could inflict actionable damages.
Negotiating a fair and equitable severance agreement can ease an employee’s transition to a new job and provide a reassuring financial cushion during the search. It can also protect the employer’s interests by safeguarding company trade secrets and preventing misunderstandings that could lead to a lawsuit.
To ensure that a severance agreement serves these purposes fairly and in accordance with state and federal law, contact Monarch Law. If you are an employee, we will review any documents you are asked to sign and advise you on how to obtain the maximum severance you may be entitled to.