Common Mistakes in Severance Agreements

Severance agreements are legal contracts between an employer and a former (or soon-to-be former) employee that provide compensation and/or benefits to the employee in exchange for certain promises and obligations, usually including a release of the employee’s potential claims against the employer.

Despite the fact that severance agreements are commonly used in organizations of all types, employers frequently make mistakes in preparing severance agreements, and their errors can cause an employee’s release of claims to be unenforceable, leaving the employee with severance benefits in hand and the employer without protection against a potential suit.

From a big picture standpoint, the most common mistake employers make is treating severance agreements like generic, “one-size-fits-all” documents, ignoring differences in state laws, changes in the law that occur frequently, and the unique circumstances of each employee. While some language is suitable for use in most severance agreements, employers should treat each agreement with care and thoughtfully consider the terms they include in it.

Some of the more specific errors that occur frequently and can render a severance agreement wholly or partially unenforceable include:

Failing to provide adequate consideration - In order to create an enforceable contract, each party must receive some form of “consideration,” or value it was not otherwise entitled to receive. Employers sometimes ask departing employees to sign a release of claims without receiving any consideration in exchange. In other cases, an employer may promise in a severance agreement only to pay the employee’s final wages (which it is already legally obligated to pay) in exchange for a release of claims. In neither of these scenarios does the employee receive valid consideration, and the employee’s release of claims will be unenforceable in both scenarios.

Ignoring, or mis-applying, the rules applicable to employees 40 and older - As mentioned above, employers often treat severance agreements as “one-size-fits-all” documents, ignoring the special rules that apply to agreements with employees who are 40 or older. The Age Discrimination in Employment Act (ADEA) requires employers to allow employees to consider severance offers for 21 days (45 days if they are terminated in connection with a reduction in force), and employees 40 or older are also entitled to rescind severance agreements for seven days after signing them. Employers often fail to include language required by the ADEA or Older Workers Benefit Protection Act when creating severance agreements for employees 40 and older, and sometimes include a right to rescind the agreement when creating agreements for employees under age 40. Employers should also recall that California law requires them to allow employees under age 40 to consider a severance proposal for at least five business days.

Including illegal terms - Some provisions that employers commonly include in severance agreements, such as covenants not to compete and broad non-disparagement clauses, are simply illegal and unenforceable under applicable law. Employers must be alert to restrictions that may exist under the law, such as California’s general prohibition of covenants not to compete and restrictions on non-disparagement clauses that exist under both state and federal law. Although severance agreements can create enforceable releases of most claims, they generally cannot operate to release claims for workers’ compensation benefits or unemployment insurance benefits.

Overlooking the impact of the agreement on other contracts - Like most contracts, severance agreements typically include a clause stating that the agreement supersedes all prior agreements between the parties regarding the same subject matter. If an employee has executed a Confidential Information Agreement or arbitration agreement, however, the employer may want those agreements to remain in effect following the execution of the severance agreement. In such circumstances, the severance agreement should specifically identify any agreements that are intended to remain in effect.

As is true with all legal contracts, prudent employers should consult with an experienced employment attorney when preparing severance agreements in order to assure that they are enforceable and provide the employer with all of the benefits and protections available under the law.

If you have questions regarding severance agreements or any other issue related to employment law, please contact one of our attorneys:

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Common Mistakes in Severance Agreements

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