Joel Dillard & Associates

Representing Working People

Severance Agreements: Gift or Trap?

Severance agreements come in two basic types. The first type includes those negotiated in advance, as part of your original employment agreement. The second type includes those voluntarily offered by the employer at the time employment ends. The two are fundamentally different.

1. Contractual: the buy out or golden parachute severance agreement.

Again, the first type of severance to consider is the golden parachute. In this types of severance, everything is usually governed in your initial employment agreement. These are sometimes called a buy out because the contract basically requires the employer to make a significant payment in order to end the employment.

These are unquestionably good for the employee. First and foremost, they act as an important check on the ability of the employer to fire the employee without a good reason. If the employee is doing well, the employer will keep them on even if they might otherwise prefer to fire them, so that they can avoid the buyout.

And there isn't much of a downside for the employee. By law, they typically cannot be interpreted to destroy statutory rights to file suit for things that happen during employment.

Often, these kinds of agreements tie the payout to the length of the employee's tenure, giving them, for example, a month of salary for each year worked for the employer. This kind of arrangement serves both employer and employee well, because it encourages the employee to stay on with the company longer, but also gives the employee an infusion of cash when beginning retirement or moving to other work. (This is basically an amped-up version of the annual leave buy-out, a very common practice which will be the subject of a future post.)

If you are in a profession where your unique skills are in high demand, you may be in a position to bargain for one of these clauses. I highly recommend it - particularly when the employer is asking for a very restrictive non-compete agreement. It makes a lot sense. If the employer wants you to promise not to practice your profession for a year or more after leaving working for them, then they ought to provide a big enough severance package to help you through that time on the sidelines. This can be a perfectly reasonable trade.

At the same time, any contract you sign - particularly one as important as an employment agreement - should be reviewed by an experienced employment lawyer to make sure it is fair to you. The firm provides this service at a surprisingly reasonable rate.

2. Post-employment severance: the full release severance agreement.

More common - particularly among less highly-specialized work - is the severance agreement which is voluntarily offered by the employer when separating you from work, usually an involuntary separation.

These severance payments aren't required by contract, or by law, so you should be asking yourself: Why am I being offered this? Is it a gift?

Usually, the answer is no. Usually, these severance agreements are attached to what is called a full release of the employer for any liability for anything they ever did wrong at any time during or after your employment up until the date of signature.

Now, I don't want to paint the wrong picture for you. Usually, you aren't really giving anything up, because you don't have a valuable lawsuit against the employer. Usually you weren't hand-picked for this severance because you pose a particular worry to the employer. Usually this does not indicate anything about how concerned your employer is about any potential lawsuit you might have. Usually, this just means your employer is smart, and wants to cover themselves and avoid any unnecessary albeit groundless litigation.


But not always. I have found it increasingly common for employers to handpick a few people to offer these severance agreements to, people that they fear might pose a particular litigation risk. Although, again, this does not mean they actually fear the outcome of the litigation - necessarily - it means they've identified this person as someone that might want to sue. If so, this may also mean that they would be willing to offer you more to settle your disputes, and you would benefit from a bit of negotiation. Again, not always, but it is sometimes the case.

Regardless of the employer's intent, however, you should definitely review this agreement with a lawyer. These are completely different from the golden parachute. These are basically full-blown settlement agreements, where you sign away significant legal rights forever in exchange for a payment.

They may have a confidentiality clause, where you promise to say nothing about the existence of the agreement. This is an alarm bell that there may be more to this than meets the eye.

They may have a non-disparagement clause, where you promise not to say anything bad about the company or your bosses ever again. This is another alarm bell.

And they may have liquidated damages provisions, where you agree to pay them (and their attorney) if you breach the contract. Huge alarm bell.

Whatever the issue, you want to know what your are giving up before you sign one of these. Buy some time - tell them you really appreciate their generosity and very much want to take it (never hurts to be nice) but that you need a few days to go over it in detail first. Then call a lawyer, talk everything through, and make an informed decision. Again, the firm provides this service at a surprisingly reasonable rate.

3. Wait a minute, just one more: statutory WARN Act and COBRA violations

There is one more, but it isn't really severance. If your employer has more than 100 employee and is laying off more than 50 or so employees in a particular month, then you may be entitled to 60 days notice under the WARN Act. If, and only if, no such notice is given, you may be entitled to up to 60 days of what is essentially severance pay instead of notice.

In addition, if you have health insurance through your employer do not get COBRA rights notifications, then you may be owed up to $110 per beneficiary per day until the proper notice is given.

Again, these aren't exactly severance, but they can function in a similar way under certain special circumstances.

I also highly recommend this linked Forbes article, which has a lot of sound advice for employees facing a decision on severance packages if you are interested in reading more.


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