Understanding Severance Agreements
A severance agreement is a contract between an employer and a departing employee that provides the employee with compensation or benefits in exchange for certain commitments, most notably a release of legal claims against the employer. While employers are generally not required by law to offer severance (unless contractually obligated), severance agreements serve important strategic and legal functions. They help facilitate smooth transitions, reduce the risk of litigation, protect confidential information, and demonstrate good faith toward departing employees.
Key Components of a Severance Agreement
Severance Pay
The heart of most severance agreements is the payment itself. Severance pay is typically calculated based on the employee's length of service, position level, and the organization's standard practices. Common formulas include one to two weeks of pay per year of service, though this varies widely. Some organizations offer a flat amount regardless of tenure. The agreement should specify the total amount, the payment schedule (lump sum or installments), and the tax treatment of the payment.
Release of Claims
The release is the primary legal benefit the employer receives in exchange for severance pay. A well-drafted release covers all potential claims, including discrimination, harassment, retaliation, wrongful termination, breach of contract, and wage and hour claims. The release should be comprehensive but clearly written so the employee understands what they are giving up. Note that certain claims cannot be waived, such as the right to file a charge with the EEOC (though the employee can waive the right to recover monetary damages from such a charge), workers' compensation claims, unemployment insurance benefits, and rights under COBRA.
Confidentiality Provisions
Severance agreements commonly include confidentiality clauses that prohibit the employee from disclosing the terms of the agreement, proprietary business information, trade secrets, and client or customer data. Be cautious with overly broad confidentiality provisions, as the NLRB has found that some confidentiality clauses in severance agreements violate employees' Section 7 rights. Ensure your provisions are narrowly tailored to legitimate business interests.
Non-Disparagement Clauses
Non-disparagement clauses require the departing employee to refrain from making negative or damaging statements about the employer, its officers, or its employees. Some agreements include mutual non-disparagement provisions, which apply equally to the employer. As with confidentiality clauses, the NLRB has scrutinized overly broad non-disparagement provisions, so work with legal counsel to ensure compliance.
Non-Compete and Non-Solicitation Provisions
Some severance agreements include restrictive covenants such as non-compete agreements (limiting the employee's ability to work for competitors) or non-solicitation agreements (prohibiting the employee from recruiting former colleagues or clients). The enforceability of these provisions varies significantly by state, with some states (like California) generally refusing to enforce non-competes. Ensure that any restrictive covenants are reasonable in scope, duration, and geographic area.
OWBPA Compliance for Employees Age 40 and Older
When the departing employee is 40 or older, the Older Workers Benefit Protection Act imposes specific requirements for a valid waiver of age discrimination claims. The agreement must be written in clear, understandable language. It must specifically refer to rights or claims arising under the Age Discrimination in Employment Act (ADEA). It must advise the employee in writing to consult with an attorney before signing. For individual separations, the employee must be given at least 21 days to consider the agreement. For group separations (such as a RIF), the consideration period extends to 45 days, and the employer must provide detailed information about the ages and job titles of those selected and not selected. In all cases, the employee must be given seven days after signing to revoke the agreement. Failure to comply with any of these requirements renders the age discrimination waiver invalid.
Negotiation Considerations
While employers typically present severance agreements on a "take it or leave it" basis, some employees (particularly executives or those with significant legal claims) may negotiate the terms. HR professionals should be prepared to discuss the amount and structure of severance pay, the length and scope of restrictive covenants, the inclusion of outplacement services or benefits continuation, the terms of any reference the employer will provide, and modifications to confidentiality or non-disparagement language. Know your organization's limits before entering negotiations, and involve legal counsel in any substantive changes to the agreement.
Common Pitfalls to Avoid
- Using a one-size-fits-all template without customizing for the specific situation
- Failing to comply with OWBPA requirements for employees over 40
- Including overly broad provisions that may be unenforceable or violate the NLRA
- Rushing the employee to sign without providing adequate time for review
- Failing to ensure the employee understands the terms of the agreement
- Not having the agreement reviewed by legal counsel before presenting it
- Offering severance for the first time during a contentious termination meeting
Strategic Value of Severance Agreements
Beyond legal protection, severance agreements serve strategic purposes. They demonstrate the organization's commitment to treating employees fairly, even during difficult transitions. They protect the employer's reputation in the labor market. They facilitate knowledge transfer and orderly transitions. And they reduce the emotional and financial costs of potential litigation. When designed thoughtfully and implemented consistently, severance agreements are a valuable tool in the HR professional's toolkit.
SHRM Exam Preparation
For the SHRM exam, focus on the legal requirements for valid severance agreements, particularly OWBPA compliance. Understand the key components of a severance agreement, the claims that can and cannot be waived, and the strategic considerations involved in offering severance. The exam may present scenarios where you need to evaluate whether a severance agreement is legally compliant, identify missing elements, or recommend improvements. Pay special attention to the timing requirements and disclosure obligations under the OWBPA for group and individual separations.