Issues Arising in Negotiating Severance Agreements

Issues Arising in Negotiating Severance Agreements by Richard B. Friedman

At the risk of stating the very obvious, a severance agreement should contain releases which protect the former employer from potential lawsuits brought by the former employee and his or her heirs. Severance compensation can serve as an important transition financial resource for a former employee. Thus, it is often in both parties’ interests to reach an agreement. This article will briefly identify some of the provisions that should be considered for possible inclusion in a severance agreement. 

Provisions for Consideration in a Severance Agreement 

Of course, the agreement should set forth the amount of severance compensation to be paid to the former employee as well as the timing of such payments. Some companies have severance policies which tie severance payment amounts to the length of an employee’s service. Many companies leave such terms for negotiation on an individual basis after an employee’s employment is terminated.

Some of the other financial terms often addressed in severance agreements, which will vary depending on the seniority of the employee, are the following:

  • health insurance;
  • unused vacation time and/or sick leave pay;
  • earned and unpaid “bonus” payments; and
  • vested and non-vested stock options.  

Severance agreements of senior personnel often provide the former employee with a certain period of outplacement services to assist him or her in securing his or her next position. A severance agreement should provide that the company will respond to inquiries from prospective employers by solely providing the former employee’s dates of employment and the last position he or she held.  

In exchange for receiving various types of severance compensation, the former employee should always be required to release all claims, whether known or unknown, on behalf of himself or herself and all heirs against the former employer. The former employee should also be required to agree to a covenant not to sue the company or to become a member of any class seeking to sue the company or to provide any assistance to any persons suing the company.  

From the employee’s perspective, ideally the former employer should also agree to release the former employee from all known claims (at a minimum) up to the date of the release. However, companies should be very reluctant to release claims against former employees that are not already known to the company since doing so would relegate the company if it subsequently learned of such a claim to an allegation that, mindful of his improper conduct, the former employee fraudulently induced the company into signing the severance agreement. Of course, a dispute could eventually ensue as to whether a particular claim was known by the company at the time the agreement was executed. One way to try to avoid that dispute is for the former employee’s counsel to try to persuade the company’s counsel to have all possible claims known by the company identified in the severance agreement if the company is unwilling to waive all known and unknown claims.  

Employers should give serious consideration to including some or all of the following provisions in severance agreements: 

  • A new non-compete provision or the reaffirmation or expansion of an existing such provision.
  • A provision whereby the former employee agrees to make himself or herself reasonably available to, and cooperate with, company personnel with respect to claims threatened or brought against the company or its officers, directors, and employees.
  • A provision requiring the former employee to notify the company if he or she is contacted by someone who is or may be legally adverse to the company and if he or she receives a subpoena relating to the company.
  • A confidentiality provision.
  • A non-disparagement clause.
  • A provision whereby the former employee waives all rights to future employment with the company and any affiliates.
  • A provision whereby the former employee represents that he or she has returned all tangible property of the company regardless of whether it contains trade secrets or other proprietary information of the company.  

In my view, all severance agreements, indeed all agreements, should have choice of law and choice of venue provisions. A severance agreement should also provide that it is the entire agreement between the parties and supersedes any prior agreements between them.  

Potential Severance-Related Issues 

Employers should give serious consideration to establishing standard severance policies with specified severance compensation packages for employees at different levels of seniority within the organization.  

If an employee is asked to agree to what he or she considers to be overly restrictive non-compete provisions, he or she should seek additional monetary compensation. However, employers should defer payment of some severance compensation to try to ensure the former employee’s compliance with his or her obligations under the agreement.  

Importance of Severance Agreements to Employers 

If there is a possibility that an employee has one or more causes of action against his or her former employer for any reason, he or she may be able to build a strong case in reliance upon his or her in-depth knowledge of the company. Of course, this is one of the main reasons why an employer would want assurance that the employee cannot sue the employer. Avoiding potential lawsuits and the concomitant distraction to management and inevitable legal fees is generally of great benefit to a company and will often override the additional monetary and other compensation that former employees and their counsel will seek through negotiation. Severance agreements are also a useful way for an employer to bolster an existing non-compete provision when it is considered desirable to do so in view of changed circumstances.  

Of course, every situation is different. We regularly counsel mid-level and senior executives as well as companies in connection with their respective unique circumstances.

Richard B. Friedman
Richard Friedman PLLC
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