By S. Eric Bass

Employers often want to offer severance to departing employees for many different reasons. For example, employers feel it is appropriate given the time the employee worked at the company, the reasons for the departure, or they want to provide a little transition pay to the employee. Regardless of why you may want to offer severance, the right approach to making this offer can make a big difference for the departing employee and you. You should consider a few short steps to make sure you get something in return for that severance, AND that you don’t pay severance to an employee that files a claim against you after receiving this payment.

As we discussed in a previous blog, How to Protect Your Business After an Employee Leaves, employers need to think broadly about their employment policies, both from a hiring and termination perspective. Today’s blog discusses how to prepare a severance agreement, the limitations, and the common pitfalls that employers should consider before offering severance.

Condition the severance upon the employee entering into a written Severance Agreement with the employer. A well-prepared Severance Agreement can avoid many future disputes with that employee and ensure that you get some valuable consideration for your money. Our advice is to always require a signed Severance Agreement before paying ANY severance to a departing employee.

Benefits of a Well-written Severance Agreement

A well-prepared Severance Agreement should provide the employer with the following main benefits and considerations for providing severance pay:

• A release of any claims the employee may potentially have against the company for anything related to their employment, such as claims for discrimination, wage payment claims, etc.
• An acknowledgment from the employee that no other wages or payments of any kind are due other than what is stated in the agreement.
• An agreement with the employee about what may be said publicly about the reasons for the termination (including Internet reviews).
• An agreement, if desired, for confidentiality regarding anything that may have happened in the workplace.
• An acknowledgment by the employee that they have returned all company property and revealed to the company all pertinent information the employee has regarding customers or other material information; and
• An agreement among the parties regarding any post-employment non-competition or non-solicitation of client’s covenants or a re-affirmation of any such previously existing covenants.

Obtaining most or all of these main benefits in the Severance Agreement can help an employer in many ways. First, it helps the employer to know, to the extent possible, that the employee will not be returning and filing claims regarding their employment. Second, it sets the expectations for each party related to what is to be said publicly about the termination of employment and about any obligations each party has moving forward.

The benefit of certain employee assurances can also help the employer later should it need to enforce any non-competition covenants or confidentiality obligations in court.

What are the limits of a Severance Agreement?

As with all legal documents, there are limits to what Severance Agreements can achieve for an employer. The primary limitations of severance agreements to consider are:

• The employer must provide NEW consideration as the severance for the agreement to be enforceable. Any compensation, bonuses, paid-time-off, or other compensation that the employer may already be obligated to pay the employee must be paid separately from the severance compensation.
• Not all potential claims can be completely released, and a former employee is still permitted to participate in specific investigations by government authorities even though they may release their rights to claims; and
• Suppose you are attempting to require any new non-competition or non-solicitation of customer covenants as part of a Severance Agreement. In that case, you need to be careful to comply with all applicable laws and regulations. Even then, the employee may not be willing to sign an agreement with these covenants in addition to releases of potential claims. As a result, the employer may have to choose whether to offer more severance compensation or abandon those additional covenants.

Be Careful – Common Severance Agreement Pitfalls

While you may prepare a great Severance Agreement, the implementation of the agreement must be done properly to be effective. Therefore, please be aware of the following additional considerations:

• You must give the employee a reasonable amount of time to consider whether to sign the agreement (You cannot insist they sign it immediately after the presentation. In fact, employees over 40, in most cases, must be given at least 21 days to consider whether to sign the agreement to release potential age discrimination claims).
• Work with an attorney to ensure the Severance Agreement releases ALL potential claims relative to the applicable states and other jurisdictions where your employee and you are located.
• While in most cases, there is no set amount or formula for severance, you should consider the amount you offer in light of any future similarly situated employees to avoid potentially feeling locked into certain amounts in the future; and
• Once you have the signed agreement, be sure not to pay the severance compensation until all applicable revocation time periods and requirements of the employee to return property or other information or provide passwords are completed.

For additional information on discrimination claims and severance, visit the U.S. Equal Employment Opportunity Commission’s website.

What if the employee refuses to sign the Severance Agreement?

In some cases, employees may believe they have a particular claim or have other reasons to refuse to sign a Severance Agreement with releases of claims. They may also try to negotiate the paid amount. In those cases, you will have to decide, with a little help from your legal advisors, whether to offer more consideration or to simply let the employee go without the signed agreement. In cases where the employee refuses to sign, please be sure not to pay the severance anyway. In some cases, we have even seen that payroll was told to pay the severance early, and it was paid without the signed agreement. If that happens, you will have difficulty getting that money back and likely could not enforce the unsigned Severance Agreement even though the employee accepted the payment. In such cases, the courts will view the situation “in the light most favorable to the employee.”  Be sure you have discussed or thought about what you will do if the employee refuses to sign the Severance Agreement.

Conclusion

While the above information doesn’t address every scenario, careful use of Severance Agreements can provide significant value to an employer. They help ensure that employees do not file claims against the employer and set everyone’s expectations for post-employment activities by the employee that may affect the former employer. Therefore, be sure to consider these agreements when terminating the employment of problem employees in particular.

S. Eric Bass is an attorney at Venn Law Group who holds both a JD and MBA, providing him with a wealth of knowledge and insight regarding the challenges business owners face. He has more than 18 years of experience in mergers and acquisitions, succession and exit planning, business partner agreements and issues, business formation, franchising, contract negotiations, strategic planning, and employment issues. His peers selected Eric for inclusion in The Best Lawyers in America® in Employment Law – Management (2019 – 2021), and he was recognized by Business North Carolina Legal Elite, Employment Law in (2021).