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Severance Agreements

Severance agreements are an increasingly common form of document used when an employer decides to release an employee from employment. The reasons for ending the employment relationship can vary dramatically from benign reasons, such as a reduction in force, to more acrimonious circumstances such as those that typify firing an employee for behavioral reasons. In any case, both the employer and the employee can find advantages in such agreements. At the same time both sides need to recognize that severance agreements exist in an environment of complex laws and court decisions that can create unexpected results for both employers and employees.

The objective of nearly every severance agreement from an employer’s point of view is to accomplish three goals: (a) to satisfy the employer’s conscience when they release an employee into the uncertainty of unemployment; (b) to obtain a release of all possible claims the employee may have had against the employer; (c) to minimize the risks of bad public relations that can result for having “unhappy alumni”. Employees see such agreements as a means of providing security while they seek other employment. These are the core elements, although many other conditions and promises can be tacked onto severance agreements.

Employees normally present three questions in relation to a severance agreement: (a) is it fair; (b) is it negotiable and (c) how will it affect me if I sign it. The answer to each of these questions depends on the circumstances, which is why it is very difficult to provide generalized answers to such questions. But, in fact, the question the employee needs to be asking in such a situation is this: “What do I want to do next for employment?” The answer to that question will normally be the key to figuring out what to do with the severance agreement. For instance, if an employee’s plan is to go immediately back to work with another employer it might not make any sense to spend time worrying about negotiating with the former employer. But if that new employer is a competitor of the former employer, and the severance agreement includes a non-compete provisions (many do) changes may be needed before the employee can sensibly sign it.

Since these agreements almost always include releases the employer needs to understand that certain rights cannot be released by an employee, such as the right to file a complaint with a state or federal agency concerning unlawful discrimination. Likewise, employers need to understand that if they want to obtain a release of certain claims cognizable under the Age Discrimination in Employment Act, they will need to allow employees 21 days to review the agreement and 7 days to revoke it after it is signed. These are only a few of the many restrictions on the effectiveness of Severance agreements.

There are of course situations in which an employer cannot satisfy an angry employee with a severance agreement, just as there are others in which an indecent employer cannot be persuaded to fairly treat an unsuspecting, loyal employee who is being unceremoniously fired after years of excellent service. But in every case, it makes a lot of sense to consider these agreements very carefully, both when they are being written and when they are reviewed because for both parties these documents may be the last chance either side has to agree on anything. Employees need to remember that employers almost never are under any obligation to offer severance pay. And employers need to remember that employees rarely want to talk to attorneys about their employment unless they are convinced they have been unfairly treated.