While severance payments to departing employees are not required under the law, they may be a useful means to make a separation easier for the employee and to avoid potential costly litigation. While they are a potential tool to protect the company, employers should not tread into this area without understanding what severance agreements can and cannot do.

Consideration. If the employer asks the employee to release all claims the employee may have against the company, there needs to be some consideration provided to the employee.

Consideration is a legal term that generally means something of value that each side agrees to exchange and is usually, but is not required to be, some form of financial payment by the employer that is not already legally obligated to be made in exchange for the release of claims by the employee. Without some type of consideration for the agreement, it is likely unenforceable.

Terminology. Severance agreements generally include the following type of provisions:

  • A general release of all claims. It is important for employers to know the particular requirements for the jurisdiction the employee is working in to ensure the general release is as broad as possible without running afoul any state laws. For example, in California, for an employee to waive all known and unknown claims, the agreement should specifically set out that the employee is expressly waiving any rights under Civil Code section 1542 and should quote this section to avoid any potential challenges.
  • Confidentiality. The severance release should provide the agreement is confidential and set forth exceptions for some limited disclosures to family members, tax advisors, attorneys or if required under the law.
  • No future employment. A provision may set forth the employee will not seek future employment with the company. This is important to avoid any potential retaliation claims by the employee if they apply to work for the company in the future and are not hired.
  • Non-disparagement/reference. A non-disparagement clause can set out what the employer and employee will disclose about the employment relationship and can also set forth what job reference, if any, will be given to any prospective employers.
  • Return of company property and non-solicitation of customers. If the employer is concerned about company property and non-solicitation of customers, this should also be set forth in the agreement.

Employees 40 years and older. In order to release a claim for age discrimination, the agreement must meet certain requirements of The Older Workers Benefit Protection Act. Among them: the employee is advised to consult with an attorney, the waiver is easily understood, and the individual has at least 21 days to consider the agreement and seven days following the execution of the agreement to revoke the agreement. While the 21-day consideration period can be waived by the employee, the seven-day revocation period cannot be. If the employer is offering the release to a group or class of employees, a longer consideration period (45 days) and other requirements apply.

Know the limits. Some things simply cannot be waived as part of a severance agreement. Employees can still file a charge with the EEOC and participate in an EEOC investigation, hearing or proceeding even after signing a severance agreement that releases all claims. Likewise, for wage claims, the general view taken by the Department of Labor is any settlement agreement releasing claims for unpaid wages under the Fair Labor Standards Act is only effective if the release is made under the supervision of the DOL or through a court approved settlement. Many states have similar requirements that may render agreements releasing wage claims unenforceable unless certain requirements are met.

Severance agreements can be a good tool for businesses, but need to be carefully written in order to comply with local and federal rules. Always consult with a qualified employment lawyer to ensure compliance and enforceability.