Draft a Severance Agreement

When an employee is fired or laid off, some employers enter into a severance agreement with the terminated employee. From the employer’s perspective, an employee is offered some amount of money and in exchange an employee waives his or her right to file any lawsuits against the employer and/or company. From an employee’s perspective, the additional money provides a small safety net for a person who lost their source of income. If you just lost your job, you may think that you should immediately sign the agreement to get some money. However, there are many provisions within the agreement that could hurt your future job prospects and therefore, it is important that you carefully review the agreement and negotiate before signing the document.

Steps

Drafting a Severance Agreement

1. Include all provisions. When drafting a severance agreement, it is important that you tailor the agreement to your specific circumstances. If you are an employee, don’t sign a generic severance letter but rather think through what parts are the most important to you and focus on restructuring those parts in a manner that may be acceptable to both the employee and employer. Generally, a severance agreement will include the following parts:
   • A termination provision that specifies the reason that the employment was terminated.
   • A description of the severance payment. This should specify all payment to which the employee is legally entitled, including unused sick and vacation days, compensation set forth in an employment agreement, an employee’s final paycheck, prorated bonuses and commission, as well as an amount of additional pay that the employer is offering in exchange for the employee waiving his or her right to sue.
   • A release provision that states that the employee is waiving his or her right to file any lawsuits, including discrimination claims, claims for unpaid wages, and/or unlawful termination.
   • A description of the employee’s health insurance benefits including information about COBRA, which is insurance that the employee can pay for out-of-pocket to remain on the employer’s insurance policy.
   • A confidentiality provision, which outlines all of the post-employment obligations an employee has to refrain from sharing trade secrets or other company business. An employee could also negotiate to have the severance agreement be part of the confidentiality provision.
   • A non-compete provision that explains in what industries or for which competitors that the employee is not entitled to work and the length of time that the provision is in effect.
   • A non-disparagement provision whereby the employee agrees not to make any negative public comments about the employer. An employee should have this be a mutual agreement so that the employer cannot make disparaging comments about the employee.
   • Some employers also offer employment services for a limited time such as access to career services or a career coach to assist you in securing a new job.
   • You can review a sample severance agreements at: http://nature.berkeley.edu/ucce50/ag-labor/7article/article36.htm and https://www.upcounsel.com/severance-agreement.
2. Comply with state and federal laws. Your severance agreement must comply with state and federal labor and employment laws. For example, there are certain claims that cannot be waived in a severance agreement, including:
   • Claims under the Fair Labor Standards Act.
   • Certain worker’s compensation claims.
   • Equal Employment Opportunity Commission claims.
   • You can review a list of federal and state labor and employment laws at: https://www.law.cornell.edu/wex/table_labor
3. Obtain employee and employer signatures. In order for the agreement to be a binding contract, both the employee and a representative of the employer must sign the document.

Negotiating the Terms of a Severance Agreement as an Employer

1. Review employee personnel records. When you are terminating one employee rather than a massive layoff, you want to carefully review the employee’s personnel file and make sure that the reason for termination is adequately documented in the record.
   • For example, if you are terminating an employee for poor performance, you should review the employees performance appraisals and other notations from the employee’s supervisor to make sure that the poor performance was documented.
   • Make sure that your basis for termination is one that is included in the employee handbook. Some general reasons for termination may include: discriminatory acts towards employees; falsifying records; violation of company policies; failure to perform assigned work; damaging company property; or stealing company funds.
   • Consider having another supervisor review the evidence in support of termination. By having someone not personally involved with the employee review the termination evidence, you have a greater chance of addressing any potential shortcomings in your evidence and have the opportunity to correct the problem before you terminate the employee.
2. Conduct an exit interview. Once you have decided to terminate the employee’s employment, a manager should meet with the employee and outline the reasons for termination. The employee should be told what the company will say to future employers and discuss any of the employee’s obligations to the company such as the protection of trade secrets.
3. Offer a severance package that includes releases and waivers. Even if you are not required to offer a severance agreement based on the employment agreement, a severance agreement is a good way to avoid future lawsuits brought by the employee. Essentially, you are offering the severance package as consideration for the employee waiving any future lawsuits.
   • If the employee is entitled to a severance agreement you must uphold your original employment agreement.
   • When crafting waivers do not attempt to have the employee waive claims that cannot be waived such as Equal Employment Opportunity Commission claims.
   • Do not engage in any behavior that could be seen as coercive or intimidating.
   • Discuss the elements of the severance package with the employee.
   • Offer the employee time to review the agreement with an attorney.
   • Set forth any non-compete clauses or agreements against working for competitors and disclosing any trade or business secrets.
   • Include a waiver of all lawsuits by the employee against the company.
   • Include the specific grounds for termination.
   • Include a severance payment in addition to any vacation time or salary that the employee is owed.
   • Make sure that the agreement complies with state and federal laws.
   • State that the employee must return any company products or business materials in the employee’s possession.

Negotiating the Terms of a Severance Agreement as an Employer

1. Review all employment and benefit information. If you are offered a severance package and asked to sign an agreement, you should ask for time to review the materials in greater detail. You should then review all of your employment and benefit information to make sure that the agreement includes all of the benefits to which you are entitled.
   • Employment and benefits information may be contained in employee handbooks, an employment agreement that you signed, and any ERISA-governed separation plans or agreements.
2. Hire an employment lawyer. Even if you only hire an attorney to review the offered severance package, you will receive a benefit from an experienced employment attorney’s review of the materials. An attorney can provide you with the following benefits:
   • Insight into whether the agreement is equitable, meaning that you are being appropriately compensated for all of the things that you are giving up, such as the right to bring a lawsuit.
   • Provide advice on which provisions you should negotiate for different language.
   • Explain all of the provisions and how they may help or harm future employment prospects.
   • Engage in negotiations on your behalf.
3. Assert any claims. If you have a case for wrongful termination, breach of contract, employment discrimination or another claim, you should assert your claim in a demand letter. Valid legal claims can be used as leverage in a severance negotiation.
   • Your demand letter should also include a “spoliation notice,” which is a warning to an employer that they can not destroy any evidence related to your claim.
   • You should provide enough detail in the letter that the employer takes your claim seriously and can recognize that you have a valid claim.
   • To view a sample demand letter visit: http://paralegaltoday.com/issue_archive/features/feature2_so07.htm.
4. Reject a standard severance agreement. In most cases, the severance agreement provided to you by the employer includes language that benefits the employer and is harmful to the employee. These agreements may unnecessarily limit your future employment potential, waive rights to unemployment insurance or other compensation. Think of the severance agreement as a first offer and you should present a counteroffer that is more balanced and protects the employee’s interests.
5. Negotiate specific provisions in the agreement. While you can certainly negotiate over every provision in the severance agreement, there are certain provisions that are particularly important to an employee and protecting his or her employment opportunities.
   • Before beginning negotiations, a terminated employee should think about what he or she wants and needs as the outcome of the negotiation and where he or she is willing to compromise if the employer refuses. The most difficult question is whether the employee is willing to forego the severance package and move forward on a legal claim. A person should only move forward with a legal claim if there are facts to support his or her position.
   • Termination reason. Every severance agreement will specify the reason the employee was terminated. This can be very damaging to the employee’s ability to secure future employment. As an employee, you are looking to strike a balance between language that will allow you to receive unemployment benefits but clearly state that you were terminated. An employer may be willing to compromise on this language if you are willing to waive your rights to bring a lawsuit.
   • Most employers will insert a non-disparagement clause in the agreement, which generally states that you cannot speak ill of the company or other employees. An employee wants to negotiate a mutual non-disparagement provision whereby the employee agrees not to disparage the company and the company agrees not to disparage the employee.
   • The waiver of lawsuits and claims provision should have an exemption for any benefits for which the employee is vested by law such as worker’s compensation benefits, indemnification for loss that has already occurred, and any vested benefits such as pensions. The agreement should also include an affirmative statement that the employee is not waiving his or her employment insurance.
   • The employee should disagree with any provision that limits the potential for the employee to be rehired by the company in the future.
   • The employee should negotiate a limit on any reduction in severance payments if the employee finds another position quickly. This is referred to as a mitigation provision.
   • The employee should demand that any waivers of claims under the Age Discrimination in Employment Act and the Older Workers Benefit Protection Act are clearly explained. The employee should reject any waiver of potential future claims should the employee be rehired.
   • Request that the terms of the severance agreement remain confidential.
   • Request a positive letter of reference from your employer and that all detrimental information be removed from your personnel file.
   • Negotiate the amount and form of your severance pay so that you can get the most favorable tax treatment. It may be worth consulting a tax specialist and have them devise the most beneficial structure of severance benefits to minimize your tax liabilities.

Tips

• Employers draft the severance agreement to be as beneficial to them as possible. As an employee, you should have a potential agreement reviewed by a lawyer before signing any agreements.

Related Articles

• Negotiate a Severance Package
• Calculate Severance Pay
• Lay Off an Employee
• Win a Wrongful Termination Lawsuit

References

See also

• Draft a Ghostwriting Agreement
• Draft a Collaborative Writing Agreement
• Sue the Government for Discrimination
• Claim Age Discrimination for Apprenticeship Programs
• Help Avoid Employee Lawsuits
• Verify Rehab Treatment for an Employee
• Handle Disciplinary Actions
• Claim Weight Discrimination
• Know if You Should Sign a Covenant Not to Sue
• Defend Yourself in a Wrongful Termination Lawsuit

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