Understanding A Severance Package
Employers are not required to offer severance payments to employees they lay off or terminate, unless there is an employment contract or company policy requiring it. Since most employees are “at will,” the employment relationship can be ended by the employer or the employee for any legal reason.
Why then would an employer offer to pay severance when it does not have to?Companies often say that severance is being offered to assist employees with their transition out of the company and to help them while they look for another job. That may be true, but it is not why most companies offer severance. To receive severance payments, you will likely be asked to sign a severance agreement, which is usually a long, complicated contract containing several terms that are beneficial only to the employer. Severance packages generally boil down to the employer paying you in exchange for two things:
1. Your agreement to not sue the company for any employment-related legal claims you may have, such as workplace discrimination; and
2. Your agreement to restrictive covenants, such as non-competition, non-solicitation and confidentiality or non-disclosure provisions that may limit your future employment.
Before signing any severance agreement, you should take time to understand its provisions. Also, make sure you understand what the agreement says about the number of days you have to sign it, and when that time period starts. While the amount of time an employer will give you may vary, employers should give you an opportunity to consult with an attorney first.
Agreements Not to SueNearly all severance agreements will require you to release – or promise not to sue – the employer for employment-related claims, whether or not they are claims you know about at the time you sign the agreement. The agreement likely will list several sources of such claims, including, for example, Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Equal Pay Act, the Age Discrimination Employment Act, the Family and Medical Leave Act, and the Employee Retirement Income Security Act, just to name a few. These laws protect employees from discrimination and retaliation by employers based on race, ethnicity, gender, religion, disability, and age or protect employees’ rights to medical leave and certain retirement and health insurance benefits.
An employer generally will require you to waive claims under these laws before paying severance so that it can achieve finality in its employment relationship with you. But, to hold you to the waiver, the employer must give you what is called “consideration” in exchange for the waiver. Typically, the “consideration” is in the form of a severance payment. It is important, and in some instances required by statute, for the employer to give you time to evaluate the waivers. You should consider speaking to an attorney to discover whether you have a real claim under any of these laws before waiving your right to sue for any claims you may have against your employer.
Some claims, like claims for unpaid wages and overtime under the Fair Labor Standards Act (FLSA) or for unemployment compensation, cannot be waived at all or can only be waived in limited circumstances.
Restrictive Covenants and Confidentiality ProvisionsYour employer will want to protect its competitive advantage by having you agree to restrictions on your future employment – particularly if you had access to your employer’s trade secrets or other confidential information. These restrictions often come in the form of non-competition, non-solicitation, and confidentiality or non-disclosure provisions.
A non-competition provision is a promise by an employee not to compete with his or her employer for a specified period of time, in a particular place, or in a particular way. A non-competition agreement may severely limit your ability to work in the industry for broad geographical areas or for long periods of time. These provisions might make it difficult to obtain another job in your field. You should make certain you understand the consequences of signing an agreement containing a non-competition clause before you sign it.
Non-solicitation provisions usually prevent the employee from soliciting either (1) other employees and/or (2) customers, clients, or vendors of the employer. These types of provisions may prevent you, for example, from selling to your current customers, even if you brought them to your employer.
Confidentiality or non-disclosure provisions typically require the employee to not use or disclose any of the employer’s trade secrets or confidential business information. The agreement the employer wants you to sign may have a very broad definition of the information the employer considers to be protected. You should make sure you understand the scope of the information you are being asked to keep secret before you sign the agreement.
Restrictive covenants and confidentiality agreements may also be found in contracts you signed when you began working for your employer or at some other time during your employment. These agreements should be reviewed together with the severance agreement so you get a complete picture of your future employment restrictions and options. Regardless of whether they are contained in the severance package or in a prior agreement, non-competition and non-solicitation agreements generally must be limited in time, in subject matter, in scope, and geographically.
You May Need an Attorney to Understand Your Severance AgreementA severance attorney can explain the provisions in your severance agreement and let you know whether they are reasonable or unreasonable for your circumstances, and can advise you on how to comply with them to avoid a lawsuit by your employer.