I am frequently asked to draft or review severance agreements, both on behalf of employers and departing executives. I have found that misconceptions abound when it comes to severance payments and severance agreements. Some of the most common involve:
- Entitlement – Unless an employment contract or benefit plan provides otherwise, there is no legal entitlement to any severance payment, regardless of the circumstances surrounding the separation from employment. For reasons referenced below, however, there may be good reason to offer severance.
- Amount – Clients often ask me what the “correct” amount of severance payment is for a departing employee. Some think there is a formula (for example, one week for every two years of employment). The truth is that the amount of any severance offered is subject to discretion as well as to negotiation, and like any negotiation, leverage comes into play. Perhaps the employer’s offer of severance is simply gratuitous, in which case the departing employee has little leverage in negotiating the amount. On the other hand, an employee who possesses confidential or damaging information about an employer may enjoy more leverage in seeking a higher severance payment in exchange for a confidentiality agreement. Likewise, an employee who has a potential legal claim against an employer may enjoy leverage in negotiating a release of that claim.
- Taxation – Generally, severance payments are taxable as wages and subject to the same withholdings.
Typically, the issuance of a severance payment is accompanied by a severance agreement. The severance agreement is the mechanism by which the employer and employee can part ways knowing that existing or potential disputes between them are resolved. In other words, the severance agreement is the parties’ best opportunity to make a “clean break” from one another. Severance agreements can address any number of items, but the most common are:
- Release – Unless contractually obligated to do so, employers are generally well-advised not to provide severance pay unless the departing employee signs a release, meaning that the employee promises not to sue. A release ensures that the employer gets something of value in return for payment of a severance.
- Confidentiality – There may be certain aspects of the employment relationship that the employer or the employee wishes to remain confidential. These considerations should be addressed in the severance agreement. Employers also usually insist that the severance agreement itself remain confidential to avoid an expectation among all departing employees of a severance payment.
- References – Severance agreements will often specify to whom any reference requests from prospective employers should be addressed and how such requests will be handled. Some severance agreements incorporate written reference letters signed by the employer and given to the employee to provide to prospective employers.
- Non-disparagement – One-sided or mutual non-disparagement provisions ensure one party will not say things to damage the reputation of the other.
- The legalese – There are technical requirements for some types of releases that aren’t at all intuitive. For instance, for a waiver of an age-discrimination claim for individuals over 40 to be effective, the employee must be given at least 21 days to consider the release, and after signing at least seven days to revoke that signature. For obvious reasons, employers should avoid actually making the severance payment until the seven-day revocation period has expired.
While properly crafted severance agreements can certainly go a long way toward giving employers and employees peace of mind, there are some claims that cannot be released under the law. For instance, even after signing a release, an employee can still make a claim for:
- Unpaid wages
- Unemployment insurance benefits
- Workers’ compensation injuries
Breakups are never easy, but a properly crafted severance agreement can go a long way toward eliminating risk for the employer while helping the employee transition to the next stage of his or her career.
This content has been prepared for general information purposes only. This information is not intended to provide specific legal advice. Legal advice is dependent upon the specific circumstances of each situation. The information provided cannot replace the advice of competent legal counsel by a licensed attorney in your state.
Benton L. Toups is a partner at Cranfill Sumner & Hartzog LLP and serves as vice-chair of the Employment Law Practice Group. His practice concentrates on representing businesses in all aspects of labor and employment law. A firm believer in the adage that “an ounce of prevention is worth a pound of cure,” Toups counsels employers on day-to-day issues and assists them in developing and implementing policies to avoid employment litigation. To contact Toups, call (910) 777-6011 or email him at [email protected].