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Severance Agreements

Eight mistakes to avoid when signing a severance agreement

How This Report Can Help You, Your Relatives and Friends

When an employer terminates employees, it often asks them to sign severance agreements containing what is known as a general release. Over the many years we've been practicing employment law, we have found there are eight mistakes employees commonly make when signing these severance agreements. We have written this report to alert you to those eight mistakes, should you be asked to sign such a severance agreement.

While it is true that a severance agreement will describe the benefits the company plans to give you, the agreement's main purpose is to have you give up your right to sue the company for any claims you may have against it. That's the general release portion of the agreement. It's usually written in legal jargon often difficult to understand, but make no mistake about it. A general release is an important legal document which courts will usually enforce. Therefore, if you sign a severance agreement containing a general release and subsequently realize you had a valid claim against the company, you won't be able to sue for the monetary damages that might have been rightfully yours, if you had not signed it.

With so much at stake, it is important to learn as much as you can about your rights. This report is a good first step. But it is only a first step. The best way to protect your rights is to discuss your situation fully with an experienced employment attorney. Please remember this report is not a substitute for that discussion with an attorney. Rather, it is designed only to get you started on the right track.

Take a few minutes, read about the mistakes other employees have made. Keep this report as a checklist you can use if you're ever asked to sign a severance agreement. Or, pass it on to friends or relatives you think might need it.

Mistake # 1: Giving Up More Than You Should

The first question you have to consider is whether you might have a legal claim against the company, say for discrimination or some other unlawful acts by the company. If you think you might have a valid claim, then there are several follow-up questions you should ask yourself. How could you prove your claim? How much money have you lost as a result of the company's conduct? If you believe your claim is a valid one that is worth more than the severance benefits offered by the company, then consult an attorney. Ask the attorney for his or her assessment of your claim and whether you should sign the agreement as presented by the company, or whether you should try to negotiate a better deal, or whether you should consider suing the company.

You also should make sure that you are not forfeiting any rights you may have under your pension or 401(k) plan. These rights are protected under the federal statute known as ERISA. In addition, make sure the general release does not apply to your rights under the law known as COBRA which allows you to continue the health insurance benefits given by the company, provided you pay the premium.

Another area to consider is what effect, if any, the release might have on any stock options you might hold. Your right to exercise the stock options granted to you during your employment often extends beyond the end of your employment. You should make sure that the general release in the severance agreement does not adversely affect those rights.

In short, don't make the mistake of giving up more than you should. If you have any doubts or questions, play it safe and consult a knowledgeable employment lawyer.

Mistake # 2: Not Getting Everything You Should

Many employers have standard severance benefits plans. These plans are governed by the federal ERISA statute which requires your employer to pay you its standard severance benefits whether or not you sign a release. In other words, if the employer is just giving you what it regularly gives terminated employees, you don't have to sign the release. In addition, if you are 40 or older, under the Older Workers Benefit Protection Act, if your employer wants you to sign a release, it has to give you additional money above and beyond its standard severance package. If you do not get the extra benefits, the release will not be valid.

Therefore, when considering the severance agreement and release, you should make sure to find out your employer's regular severance program. Are you getting only the benefits promised in the regular severance plan? If you are and the company wants you to sign a release, you may be entitled to additional money for signing the release.

Mistake # 3: Ignoring The Noncompete Agreement You May Have Signed

Before or during the term of employment, many companies require their employees to sign "noncompete agreements." These agreements often prevent an employee from working for a competing company for a certain period, sometimes for as long as a year or more. Depending on the industry, a noncompete agreement can severely limit your ability to find a new job in the area. Courts will often enforce these agreements even after your employment terminates, no matter what the reason for the termination was.

If you have signed a noncompete agreement that will limit your ability to find a new job, are your severance benefits going to be adequate? For example, what are you going to do if your severance benefits are only six months salary, and your noncompete agreement prevents you from working for a year?

Mistake # 4: Not Considering Future References

Many severance agreements are silent about the references an employee will receive from the employer. In effect, this means that your employer's human resources department will give only a minimum of information about your employment at the company. This lack of information could make it harder to find a new job.

In the severance agreement, you may be able to control the type of reference you will receive. Remember, when you sign a general release, you are giving your employer something of great value. It, in turn, should give you something of value and that value need not be measured only by money. It also can take the form of intangibles such as references to future employers. Therefore, before signing a severance agreement, you should consider the type of reference you would want and who will be the person your prospective employers should contact for the reference. Once you've worked that out in your own mind, discuss it with your employer to see if that could be included in the severance agreement.

Mistake # 5: Agreeing To An Overly Broad Confidentiality Clause

Many severance agreements have a confidentiality clause that prevents you from telling anyone about your severance benefits and the other terms of the severance agreement. However, there are some people with whom you should be able to share the terms of the severance agreement. Certainly, you should be able to talk to members of your immediate family. You also have to be able to talk to your attorney and your tax advisors. Are there other people that you might want to consult? For example, would you want to discuss it with your therapist or family counselor?

There are other situations where you might have to disclose the terms of the severance agreement. For example, the IRS could demand a copy of the agreement. Another example is where you are called to be a witness in a lawsuit, and you are asked about the terms of the severance agreement.

A properly worded confidentiality clause would exempt all of these situations, and an employer usually does not object to including these kinds of exceptions in the clause.

Mistake # 6: Agreeing To Forfeit Your Benefits In Certain Situations

Many severance agreements provide that you will have to pay your employer "liquidated damages" if you don't keep all of the promises you made in the agreement. Often, the liquidated damages will be the complete forfeiture of your severance benefits.

Do not sign a severance agreement that contains this type of liquidated damages or similar forfeiture clause. It is totally unfair and gives the company too much leverage over you. For example, should you lose all of your benefits because you told one of your good friends in confidence what your severance benefits were? Also, who is to say whether or not you kept your promises? Should this decision be left to the company? And if the decision is going to be made by a court, can you afford the costs of a lawsuit?

You can avoid these and other problems if you negotiate a severance agreement that either omits a liquidated damages clause completely, or contains a clause that requires at best only a minimal amount of damages.

Mistake # 7: Not Receiving All The Information You Should

Congress recognized that employers can use a reduction in force to disguise age discrimination. It also recognized that some statistical information about a reduction in force may well indicate whether or not age discrimination was involved. Therefore, in the Older Workers Benefits Protection Act, Congress has required employers to provide employees with information about the ages of the people being laid off and those being retained. In addition, the EEOC has adopted regulations which specify exactly how much information should be given to you and how it should be formatted.

This information is important to you if you are 40 or older. There are some relatively simple statistical formulas which will indicate whether or not you might have a claim for age discrimination. Therefore, before signing the agreement you should insist that the employer give you this information. And if some information is included, you should make sure that it meets the standards met by the EEOC. Finally, when you have received all of the required data, you should analyze it to see if there seems to be any statistical evidence of age discrimination.

Mistake # 8: Not Getting Appropriate Time To Consider The Agreement

Before you sign a severance agreement and general release, you have to think about a lot of different things. It is not a decision that should be made in a rush. Because of this, Congress in the Older Workers Benefits Protection Act required employers to give terminated employees, who are 40 or older, sufficient time to think about the proposed severance agreement and release. The particular amount of time an employer must give the employees depends on the circumstances surrounding the termination.

When only a single individual is being terminated, the company has to give you only 21 days to decide whether or not to sign. When there is a general reduction in force, the employer has to give you at least 45 days to review the agreement before signing it. In addition, there is also a seven-day revocation period after you have signed. In other words, you have seven days from the date you sign the agreement to change your mind. If you then decide that you don't like the severance agreement, you can cancel it and retain the right to pursue any other remedies you believe you have.


We hope this report has been useful to you. Also, if you think a friend or relative could use it, please pass a copy on to them.