Severance Agreements in Connecticut
In order to assist employers and employees alike, I have provided a summary of the law regarding validity of waivers found in severance agreements; common provisions seen in severance agreements; enforcement of these agreements; and considerations for employees prior to signing severance agreements.
IntroductionEmployee reductions and terminations are unfortunately a common occurrence in our economy. Businesses of every size may determine to let employees go based on performance and experience issues or reductions of entire positions, divisions, or departments. Occasionally, businesses lay off employees who are eligible for retirement, have been with the company the longest, and are being paid the highest salaries. Often times when an employee is terminated, they believe they may have been discriminated against based on their age, race, sex, national origin, religion, or disability.
To reduce the risk of litigation, employers sometimes offer the employees they are terminating a sum money or benefits in exchange for a release or waiver of all liability for any claims connected with the employment relationship. Therefore, when a company decides to terminate an employee, one of the first issues the employer contemplates is whether to obtain a release from the employee. Whether or not to seek a release often depends on the circumstances surrounding the departure of the employee. One school of thought is that whenever there is a benefit provided to the employee, such as a severance payment, an employer should obtain a release as a prerequisite to providing the benefit. Often times when employers would like to avoid being sued for wrongful termination, they consider a separation agreement in which they offer a severance payment in exchange for a release. Many employers have found that their employment litigation is reduced when they require releases in all cases in which they pay severance benefits. On the other hand, some employers are hesitant in seeking a release from terminated employees because they are worried that employees will often assume that the employer fears a lawsuit by the employee and the release symbolizes a cover for that apprehension. However, many employers utilize standard release language when terminating employees.
Validity of WaiversWhen employee terminations are not part of an overall workforce reduction, a waiver of age discrimination claims will only be valid if the following conditions are met:
1. It is knowing and voluntary;
2. It is in writing and was written in a manner calculated to be understandable to the employee;
3. It must refer to rights and claims available under the Age Discrimination in Employment Act;
4. It cannot waive claims that arise after the waiver is executed;
5. The employee must receive consideration in addition to the benefits the employee was already entitled to;
6. The employee must be advised in writing to consult with an attorney prior to signing the waiver;
7. It must allow the employee at least seven (7) days to change his or her mind and cancel the agreement; and
8. The employee must be given at least 21 days to consider whether or not to sign the waiver.
If the termination is part of a reduction in force (RIF) or voluntary program that affects two or more employees, the employee must be given at least 45 days to consider agreement and be given a “release attachment” that contains a list of those selected for the program (or termination) and those employees that were not selected.
Employee Checklist regarding Severance Agreements1. Check for deadlines
The moment that an employee receives a severance agreement from their employer, it is important to note any deadlines imposed by the employer regarding accepting or declining the agreement. If the employee is 40 years or older, federal law requires the employer to give the employee at least 21 days to consider the agreement. If the employer has imposed a deadline that is unfeasible, employees can request additional time to consider the agreement. However, make sure the request is in writing.
2. Read and Understand the Agreement
It is important for employees to read and understand their severance agreement prior to signing it. If the employee is 40 years or older, the law requires that the agreement is written in a manner that is easy to understand, which means that it should not contain long complex sentences that are confusing or hard to understand.
3. Have an Attorney Review the Agreement
Prior to signing any agreement ending an employment relationship, employees may want to ask for advice from an attorney as to whether the terms are reasonable, whether any of the terms could be modified or negotiated, and whether they should sign the agreement. As many severance agreements have deadlines regarding signing the agreement, it is imperative to promptly consult with an attorney so that the agreement can be reviewed and negotiated in a timely manner. If the employee is at least 40 years old, the agreement must advise the employee to consult an attorney prior to signing the agreement. Being given the opportunity and time to consult counsel is paramount because it can otherwise be waived.
4. Understand What is Given up in Exchange for Benefits
When employees sign away their rights to bring legal claims against their employer, the main benefit they receive is cash payments or benefits, like health insurance. If the employee believes they were wrongfully terminated due to age, race, sex, religion, or some other discriminatory reason, the benefits of signing a severance agreement should be carefully considered. It is important to weigh the likelihood of the claims prevailing against an employer and the probable costs associated with bringing those claims and the likelihood of prevailing or not. Also, employees should make sure that the agreement is offering something valuable that the employee was not otherwise entitled to. That is the key to the negotiation, if any.
5. Ensure the Agreement Does Not Waive Nonwaivable Rights
Employees should review the proposed severance agreement to ensure that it does not request that the employee waive their rights to file a charge, testify, assist, or cooperate with the EEOC. Also, the agreement should not request employees to waive rights or claims that may arise after the date the agreement was signed. Additionally, the employer should not request that the employees release their claims for unemployment compensation benefits, workers compensation benefits, claims under the Fair Labor Standards Act, health insurance benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA), or claims with regard to vested benefits under a retirement plan governed by the Employee Retirement Income Security Act (ERISA).
Checklist of Key Severance Provisions1. Release of Claims
Some releases of claims are mutual, in that the parties agree to release claims they could have brought against one another. Of note, parties cannot agree to release future rights or claims. Prior to executing the release, it is important to determine the scope of the release of claims—that is, whether it is global to all possible claims or limited in regard to claims made in a particular lawsuit or charge. Moreover, some claims and rights cannot be released by law. For example, obtaining a promise that an employee will not file a charge or assist in EEOC investigations constitutes unlawful retaliation which violates federal employment rights.
2. Dismissal of Suit or Charge
In the event an employee had filed a charge or lawsuit prior to the severance agreement, then the agreement should specifically identify the venue and docket number, designate whether the parties will file a stipulation of dismissal with or without prejudice and with or without leave to reinstate the original suit, and whether it retains the court’s jurisdiction over the settlement agreement.
3. Consideration for the Agreement
In order for the severance release to be enforceable, it must be supported by consideration—a long standing contract principle. This means that the employee must receive some actual benefit in exchange for releasing potential claims against the employer or agreeing to a non-competition agreement. There is no set rule in Connecticut, or in the United States for that matter, as to what the appropriate amount of severance is under the circumstances. Many employers adopt a formula for calculating severance payments based on how long the employee has been with the company and the type of position the employee held.
An offer of employment always constitutes adequate consideration for the employee’s promise not to compete. Therefore, it is sound policy to require an employee to sign a restrictive covenant at the commencement of the employment period. At the time the offer of employment is made, the employer should discuss the agreement and provide a copy of the agreement before the employee accepts the offer. Employers may also offer pay raises, severance payments, or other benefits as consideration for a non-compete agreement.
a. Monetary Payments
It is important to consider whether severance payments issued to an employee will be paid in a lump sum or in periodic installments. Additionally, the agreement should specify all specifics of the severance payments including when the payments will be due, the method of payment, whether the amounts paid have taxes withdrawn, and how the payments will be reported for tax purposes.
b. Health Insurance Benefits
In consideration of a severance agreement, employers can provide continued health insurance benefits under a group policy for a period of time before COBRA coverage begins. Also, the employer can agree to cover the costs of the COBRA premiums directly or reimburse the employee for the costs of the premiums. In addition, the specific length of time that the employer is paying for health insurance payments should be stated in the agreement.
Also, an employer can address, within the agreement, whether it will continue to finance other benefits on behalf of the employee, such as life and disability benefits for example. Alternatively, if the employer is no longer financing these benefits, the agreement should notify the employee of any conversion and expiration rights under the benefit policies.
c. Vacation and Sick Leave
The agreement should state whether or not the employee is compensated for any unused vacation or sick leave at the time of separation. In the event the employee is compensated for unused time off, the agreement should specifically state what amount is being paid to the employee as a credit for building up and earning compensation credit for not using the benefit during the employment.
Equity benefits include stock options, restricted stock units (“RSUs”), phantom stock, and stock appreciation rights (SARs). Often times during severance agreement negotiations, the parties discuss plan eligibility requirements, vesting and execution deadlines, approving discretionary determinations that plan requirements are met, whether buy-back provisions are met, and whether cash value of the benefits can be negotiated.
Prior to negotiations regarding the severance agreement, it is important for counsel for the employee to review all plan documents regarding equity benefits, as well as deferred compensation/supplemental executive retirement plans, and pension/retirement benefits as well as the application of ERISA laws. Usually, most severance agreements state that the severance agreement does not apply to vested or accrued benefits under an employer-sponsored plan.
e. Outplacement Services
Sometimes employers offer outplacement services to the departing employee’s severance package to assist with potential job search in the appropriate market. It is important that the employee understand wat types of services will be rendered under the outplacement services and how long the services will be provided. Also, employees should consider whether cash in lieu of outplacement services is more appropriate under the circumstances.
f. Bonuses and Commissions
If the employer is compensating the departing employee by issuing payment of bonuses, the agreement should specify the amount and timing of the bonus payments. Furthermore, if the employer is compensating the employee for more than one bonus plan, each plan should be specified within the agreement and addressed separately and whether the bonuses relate to past performance as opposed to other bonus-based incentives.
If the employee is entitled to commissions, the agreement should state what amount will be paid to the employee and when it will be paid. Furthermore, the agreement should include descriptive explanations of the commissions that the employee is entitled to.
4. Unemployment Benefits
An employer cannot guarantee that an employee will receive unemployment benefits because the determination as to the employee’s eligibility is made by a third party. However, employers often agree within severance agreements to not contest an employee’s application for unemployment benefits.
5. Characterization of the Employee’s Departure
Sometimes the parties may agree to include a reason for termination of employment in a severance agreement by specific category such as reduction in force, reorganization, restructuring, new management team, merger, workforce adjustment, or pursuit of other opportunities. It is important to carefully consider how the termination is categorized as it may have an impact on unemployment benefits. However, other times the severance agreement documents can simply state that the employment relationship has been terminated without giving any reason.
The employer will have to inform other employees that the dismissed employee no longer works for the company. Employees should only be informed to the extent necessary for the business purposes of the employer.
If the employer agrees to provide a neutral or positive reference for the departed employee, the agreement should state what will be said by the employer. In regard to a neutral reference, the agreement should confirm which specific facts will be disclosed, such as length of employment, and title held, and how those are the only facts that will be provided to prospective employers. For positive letter of recommendation, the content of the letter should be negotiated, a signatory named, and a copy of the letter should be included as an exhibit to the severance agreement.
7. Non-Compete Provisions
Non-compete provisions restrict former employees from competing with their former employers in a similar field for a period of time. However, non-compete agreements will only be enforceable if they secure a legitimate and protectable interest of the employer. Employers may utilize non-compete agreements or restrictive covenants in order to protect the company’s proprietary, confidential, and intellectual property interests. Company’s may also use non-compete agreements in order to protect its customer relationships, information, data and value of the training and development of its employees. Courts are less likely to enforce a non-compete agreement that is clearly utilized to suppress competition or discourage employee turnover by reducing prospective job options.
In court, non-compete provisions will generally be narrowly construed and any ambiguity will be interpreted against the employer. Courts will find that a non-compete agreement is enforceable if it is found to be reasonable. In particular, courts will determine if the non-compete agreement is narrowly tailored specifically to the applicable employee and situation. Courts are more likely to allow a non-compete agreement to prevent the former employee, for a reasonable time, from soliciting certain customers in certain business areas or markets in which the former employee has learned sensitive information about the employer.
Additionally, courts will likely enforce non-compete agreements that are reasonable in duration and do not exceed the period of time that is necessary to protect a legitimate interest of the employer. The appropriate duration for a non-compete agreement will depend on the nature and type of job the employee was performing. Generally, courts have found that the duration of the non-compete agreement should approximate the length of time it would take the employer to find a replacement employee, train the employee, and assign the employee to similar tasks that the prior employee handled. In instances where employees have contact with customers on an infrequent basis, it may take a longer period of time for a new employee to develop the customer relationships that the prior employee had.
In regard to the geographical scope of the non-compete, it should be limited to no greater than the area in which the employer engages in business, and should generally represent the area in which the former employee worked or serviced customers. In instances in which an employee works in a high-technology industry, non-compete agreements have been upheld globally. However, the employee is usually allowed to work for a competitor as long as the work is not in the same capacity in which the employee worked for the former employer and the employee is precluded from working on projects in direct competition with the former employer.
Courts will also consider whether the non-compete agreement imposes an undue burden on the employee. A balance must be struck so that the employee is not prevented from being able to work and earn a living. If the former employee is not precluded from working in his or her chosen field, a Court will be much more likely to enforce such agreement. Many employers find that their interests can be adequately protected through the use of an anti-piracy agreement as opposed to traditional non-compete agreements.
Of note, in 2016, Connecticut passed a statute that restricts non-compete agreements involving physicians. According to the statute, a covenant not to compete is valid and enforceable only if it is necessary to protect a legitimate business interest, reasonably limited in time, geographical scope and practice restrictions as necessary to protect the business interest, and be otherwise consistent with the law and public policy. Furthermore, any covenant not to compete that is executed, amended, extended or renewed on or after July 1, 2016, shall not: “(A) restrict the physician’s competitive activities (i) for a period of more than one year, and (ii) in a geographic region of more than fifteen miles from the primary site where such physician practices; or (B) be enforceable against a physician if (i) such employment contract or agreement was not made in anticipation of, or as part of a partnership or ownership agreement and such contract or agreement expires and is not renewed, unless, prior to such expiration, the employer makes a bona fide offer to renew the contract on the same or similar terms and conditions of (iii) the employment or contractual relationship is terminated for cause. (3) Each covenant not to compete entered into, amended or renewed on and after July 1, 2016, shall be separately and individually signed by the physician.” Conn. Gen. Stat. § 20-14p.
8. Anti-piracy/Anti-solicitation Provisions
Anti-piracy agreements generally prevent former employees from taking or diverting their former employer’s customers or employees. These agreements are clearly focused on protecting the employer’s relationship with customers that the employer has paid the employee to develop and maintain. Anti-piracy agreements, with no geographical limitation, have been found to be reasonable by courts if they are limited to specific customers and do not restrict the former employee from competing in his or her chosen field. Customer lists are often listed in a schedule to the agreement.
Anti-solicitation provisions prevent former employees from directly or indirectly soliciting customers of the former employer. Courts are much more likely to enforce anti-piracy and anti-solicitation provisions than non-compete agreements as anti-piracy and anti-solicitation provisions do not restrict the former employee from competing in the same industry as the employer. Depending on the language of the provisions, it allows the former employee to work in the same industry by restricting the employee from soliciting, selling, or servicing the specific customers of the former employer. These provisions are more readily enforceable as courts have found that an employer has a greater protectable interest in preventing its customers from being solicited by the former employee than by the employee being prevented from working in the same industry for a period of time.
9. Confidentiality Provisions
Confidentiality agreements within severance agreements should be mutual as both parties usually have an interest in keeping the terms confidential. Confidentiality agreements generally prohibit employees from disclosing the employer’s confidential information, which can constitute more than trade secrets. However, as with non-compete provisions, it is important for an employer to not overreach in defining what confidential information is. Furthermore, courts may interpret a broad confidentiality agreement that prevents a former employer from working for another company in the same field as a non-compete agreement in substance. Additionally, in practice, the confidential information must be actually treated as confidential by the employer in order for it to be protected by the agreement. Any designation of documents as “confidential” demonstrates that the employer intends on protecting such information and treating it as confidential.
Additionally, employers often want to keep the severance agreement private and confidential in light of containing the dispute. Therefore, employers often incorporate a confidentiality provision that limits the disclosure of the severance agreement to only those on a “need to know basis.” These individuals are usually limited to immediate family members, attorneys, and financial/tax advisors along with a few other possible exceptions when required by law.
As of 2016, the Federal Defend Trade Secrets Act allows owners of trade secrets to bring a cause of action in federal court if there are misappropriations of their trade secrets. Owners of trade secrets can now seek remedies including injunctive relief, money damages, and exemplary damages of up to two times the amount of damages. If the owner of the trade secret prevails in federal court, attorney fees may also be recoverable. The statute of limitations for these claims is three years.
An employer may also seek to obtain an injunction under the Uniform Trade Secrets Act (“UTSA”) in order to restrict a former employee from misappropriating the employer’s trade secrets. To obtain relief under the UTSA, the employer will have to show that the (1) the information derives economic value from not being publicly available or discoverable, and (2) the employer took reasonable efforts to maintain the secrecy of the information. If the employer can prove malicious misappropriation of a trade secret, the employer could obtain double damages under the UTSA.
The parties to a severance agreement may wish to indemnify the departing employee or include a statement that the employee will be afforded with the protections given under the employer’s existing indemnification procedure. Often times, these clauses are bilateral in nature. In other words, the employer and the employee are bound to hold the other harmless and indemnify the other if one is harmed by the conduct of the other arising out of a breach of the severance agreement. This would include protection against claims by third parties and would cover costs, expenses and attorneys’ fees.
11. Choice of Law Provisions
It is important that the law that governs the severance agreement is the law of the state where the agreement will be enforceable. The state selected within the severance agreement should have a connection to the employment relationship and will typically be the location where the employee performed his or her duties.
12. Cooperation Clauses
Employers may seek to have departed employees cooperate with a lawsuit, claim, or regulatory matter that the employees have knowledge of. The agreement could be negotiated to state that the employee will cooperate as long as certain conditions are met. Often times the agreement will state that the cooperation will be provided under mutually reasonable circumstances, or up to a limited amount of time, a negotiation of per diem or per hour compensation for the employee, that the employee will be entitled to reimbursement of all expenses, and payment of legal fees incurred by the employee. These types of provisions are also often merged with the confidentiality provisions as the cooperation scenario can shed unwanted light on the nature of the departure and severance.
13. Non-disparagement provisions
Many severance agreements contain a non-disparagement provisions which prevents the employee from spreading ill will or negative remarks about the employer. Further, agreements may also contain mutual non-disparagement provisions which prevent the employer from disparaging the former employee. Bilateral promises not to belittle, mock, ridicule, criticize, vilify or denigrate each other should be reviewed for equality in enforcement.
14. Dispute Forum and Jurisdiction
Severance agreements can state which court or forum will have jurisdiction over disputes concerning the agreement. Also, the agreement can specify if all disputes will be resolved by binding arbitration or non-binding mediation. That can also cause parties to a severance agreement to be compelled to conduct the scope of discovery if necessary in a particular way given the chosen venue if litigation is eschewed.
15. Remedies for Breach of the Agreement
Agreements will often have provisions stating that the parties are subject to injunctive relief to secure specific performance, and to prevent a breach or threatened breach of the agreement. Employers and employees may wish to include a liquidated damages provision to incentivize adherence to the promises made within the agreement. Attorney fees and costs are also generally mandated by the agreement to be awarded to the prevailing party for any breach of the severance agreement.