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Severance Agreements and Release of Claims

Essentially, the idea behind a severance agreement is that an employee agrees to take something of value to which he is not otherwise entitled — additional compensation, benefits, or other “in kind” consideration — in exchange for agreeing not to sue his employer.

Unfortunately, even a totally justified, squeaky-clean termination of employment isn’t bulletproof 100% of the time. An employee determined enough to sue his employer will do so, and the company will end up spending a good chunk of change defending even a borderline meritless claim by an employee who is fired or laid off. That’s where the severance agreement comes in.

A severance agreement that includes a full release of claims is the only way an employer can be reasonably sure it won’t be dealing with the terminated employee again. Of course, peace of mind has a price.

HR Guide to Employment Law: A practical compliance reference manual covering 14 topics, including discrimination and a section on severance agreements

When should an employer offer an employee a severance package?
The risk factors of firing or laying off an employee need to be evaluated to determine whether a severance agreement is worth the expense. Is the employee in a protected category under a discrimination law (more significant, is she likely to be replaced by someone not in the same protected category)? Has the employee recently engaged in protected activity such as taking leave under the Family and Medical Leave Act (FMLA), filing a workers’ compensation claim, organizing employees for a union, or blowing the whistle on her employer? Is there an employment contract in the picture?

When there are complicating factors, a release of claims is probably worth more to the employer than a run-of-the-mill “at-will” termination. Also, the nature of the employee’s misdeeds needs to be taken into account. For example, it’s probably not beneficial to offer a severance agreement to an employee who was caught stealing, engaged in insubordination or workplace violence, or committed some form of harassment, even if he is in a protected class or seems like a high risk to sue.

Employers need to set a precedent in such matters. If it becomes known that employees who engage in egregious behavior are essentially “paid off” on their way out the door, overall workplace conduct and morale are likely to be affected. Indeed, an employer can even appear to be complicit in the employee’s bad behavior in such situations.

Audit your severance agreement policies and practices with the Employment Practices Self-Audit Workbook

Other considerations when offering a severance agreement
The other thing about severance agreements is employers can’t force employees to sign them. All an employer can do is offer a severance agreement. And sometimes, an employee who never had a thought about suing starts to think about things differently once he sees the agreement. He may look at the list of claims in the release and wonder if any apply to him. He may wonder why his employer took all the trouble to pay an attorney to draft such a nice, official document if they weren’t worried about something.

And remember, for the severance agreement to be enforceable, the employee must be given a reasonable amount of time to consider it. To obtain an enforceable release of age discrimination claims under the Older Workers Benefit Protection Act (OWBPA), an employee must be given 21, or sometimes even 45, days to consider the agreement — so he’ll have time to talk to his spouse or his friend’s son (who’s a lawyer) and probably get even more ideas and encouragement.