Parting on Good Terms: Best Practices for Severance Agreements
Sometimes you have to say goodbye. When you need to let go of an employee, make sure the severance plan at your company is in top form by following these steps.
We have previously written about employee terminations. However, once an employer has decided that it is proper to terminate an employee, what are the best practices to facilitate that termination? For starters, among other things, the employer should strongly consider asking the departing employee to enter into a separation and release of claims agreement—which is more commonly referred to as a “severance agreement.” In this article, we will explore a handful of the many important provisions that deserve very careful consideration when drafting an employee severance agreement.
A severance agreement is a contract between an employer and a departing employee that sets out the terms of the employee’s separation. These contracts routinely include releases of legal claims that the employee may have against the employer in exchange for benefits that the employee would not otherwise be entitled to receive. They might also include protections for the employer’s confidential information, as well as restrictions on the employee’s ability to compete with the employer, among many other important items.
Whether an employee’s departure is voluntary or involuntary, employers should consider asking departing employees to execute well-written, legally compliant severance agreements for three reasons.
First: The releases contained in severance agreements can generally minimize the risk of post-termination litigation between the employer and the employee.
Second: Severance agreements can serve as useful reminders of employees’ continuing obligations under any existing restrictive covenants (i.e., an ongoing promise to continue doing or refrain from doing something), and they can, moreover, provide a means for departing employees to reaffirm their obligations under these covenants.
Third: Severance agreements also give the employer a chance to bind departing employees to new, post-termination restrictive covenants.
Release of Claims
As mentioned above, the departing employee’s release of claims in a severance agreement can help the employer avoid post-termination litigation. However, special care is required when drafting this portion of the severance agreement because certain kinds of claims under state or federal law (or both) can only be released if certain requirements have been met, while still others cannot be released at all—no matter what kind of consideration the employer offers in exchange for the release. In any case, special care is required to ensure that the release is consistent with applicable laws and regulations.
For example, employees aged 40 or older are protected under the federal Age Discrimination in Employment Act of 1967[i] (the “ADEA”), and its various amendments, including a 1991 amendment called the Older Workers Benefit Protection Act[ii] (the “OWBPA”). These statutes provide specific requirements for releases contained in severance agreements presented to employees aged 40 or older. To be enforceable, releases of ADEA claims must specifically reference the ADEA. Further, they cannot release the employee’s right to file charges with (or participate in proceedings before) the Equal Employment Opportunity Commission, nor can they release any claims arising after the effective date of the employee’s severance agreement. Furthermore, the release must confirm that the employee has been advised, in writing, of the right to consult with an attorney of the employee’s choice regarding the agreement before executing it. The employee must also have been apprised of the right to take at least 21 days to consider the whether to sign the agreement, as well as the right to revoke it for seven days after signing. These are just a few examples; this list of requirements is by no means exhaustive.
Certain other federal claims likewise cannot be released except under a limited set of circumstances. For example, federal minimum wage and overtime claims under the Fair Labor Standards Act of 1938[iii](“FLSA”), generally cannot be waived or released—although this may not be true in all jurisdictions depending on the facts and circumstances of a case.
As another example under Ohio law, specifically, employees cannot release claims for unemployment benefits[iv], or (with some limited exceptions) workers’ compensation benefits[v].
An essential restrictive covenant in most severance agreements will generally require departing employees to keep the employer’s valuable information confidential. The best definitions of “confidential information” are tailored to the employer’s specific needs and concerns according to what is customary in the employer’s business and industry. The specific categories of information that the employer intends to protect from disclosure or misuse should be explicitly referenced in the definition of confidential information. For example, certain kinds of employers may value actual or prospective customer lists, while others may value software source code or other valuable technologies.
Another restrictive covenant, commonly referred to as a “non-compete,” is routinely present in severance agreements. A non-compete prohibits a departing employee’s ability to compete with the employer for a limited period of time and within a limited geographic area. Whether, and the extent to which, a non-compete is enforceable depends on the jurisdiction: not all jurisdictions recognize non-competes.
In Ohio, courts analyze the facts of a particular case under a reasonableness test to determine whether a non-compete is enforceable. An Ohio employer seeking to enforce a non-compete will have to show that the language of the non-compete: (1) is not greater than reasonably required to protect the employer’s legitimate business interests; (2) does not impose an undue hardship on the departed employee; and (3) does not harm the public interest[vi]. Of course, the meaning of these criteria can change depending on the employer’s industry and the position and responsibilities formerly held by the departed employee.
In addition to releases and restrictive covenants, severance agreements normally contain a number of other important provisions, any of which may or may not be appropriate depending on the facts and circumstances.
If you have questions regarding what kind of severance agreement may be appropriate in a given context, you should contact an attorney. If properly drafted, a severance agreement can reduce the risk of post-termination litigation, help protect confidential information, and reduce or eliminate unfair competition. You should contact an attorney for additional information regarding the usefulness and advantages of severance agreements under different circumstances and in different jurisdictions.
This article is for informational purposes only. It is merely intended to provide a very general overview of some of the reasons why severance agreements may be beneficial or appropriate. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney. If you have questions about your particular legal situation, you should contact an attorney.
Max Julian is an attorney at The Gertsburg Law Firm. His practice focuses on business litigation. He can be reached via email at email@example.com or by phone at (440) 571-7541.