Severance and release agreements limit an employer’s liability

By Sean Banks
It’s not uncommon for employers to provide exiting employees, whether leaving voluntarily or involuntarily, a severance package and yet, fail to require a release of claims in exchange for severance.

An employer may require the employee sign a release of claims before giving an employee a severance package.  A question to ask yourself, “am I sure there are no reasonable grounds as determined by a jury (not me), under which this employee might file an action against the company.”  And even if you’re certain the employee has no legitimate action, it may still be prudent to offer a severance in exchange for a release of claims.

In determining whether a “severance and release” should be offered to the employee be sure to review, among other documents, all past grievances by the employee as well as their disciplinary file and performance evaluations. While the employee may leave in a contented and emotionally stable place, the statute of limitations can extend years beyond their exit, and it can be difficult to predict the whims and influences that might later impact the former employee’s understanding of past events and motivations. There circumstances and recollection of past treatment may change and inspire them to seek remuneration for perceived or actual wrongs. If an employee is leaving your employment, contact your risk manager and consider your options.  Chief among discussions should be whether and what amount of severance is provided and ensuring the employee signs a legally sound “Severance and Release Agreement.”

As for severance amounts, there is no one right offering.  However, there are some general guidelines which are helpful.  Severance packages for employees leaving voluntarily largely range between 1 and 2.5 weeks of pay per year worked.  The further an employee moves up the organization hierarchy the closer they are to “earning” 2.5 weeks of pay per year worked.  If the employee leaves involuntarily, the ranges increases.  At the low end of the scale 1.5 weeks per year all the way up to 3 weeks per year for company executives. Again, these are general guidelines.

The Agreement will include language designed to pass the test of judicial scrutiny.  What follows are elements to include in the Severance and Release Agreement:

  1. Severance Payment: Identify the amount of severance and any additional arrangements (e.g. covering a departing employee’s COBRA premium).
  2. Release: A release of all claims the employee may have, known or unknown, including the claims under specific employment laws (e.g. ADEA).
  3. Confidentiality: A requirement that the terms are kept confidential.
  4. Non-Disparagement: The employee is refrained from disparaging the employer.
  5. Cooperation: The employee may be required to comply fully with an employer’s request for assistance in a project, legal proceeding and/or investigation.
  6. Non-Compete: The non-compete may be a different agreement but consider incorporating it by reference.
  7. Integration Clause: The Agreement represents the entire understanding between the parties.
  8. Specific Requirements for workers over the age of 40:
    1. Provided 21 days to consider the and sign the agreement;
    2. Provided seven days to revoke the agreement; and
      Advise employee to consult with attorney before signing.
  9. Remuneration Date: Articulate employee will receive severance check after the time of consideration and revocation have passed.

If you have questions or desire feedback on this topic or other risk management subjects please contact one our team professionals at Golsan Scruggs.