Win-Win Severance Agreements



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NCNG Network News
Sept. 7, 2012

Severance agreements are an important way to reduce legal risk in the event an employee leaves your organization, whether voluntarily through resignation or involuntarily through termination. But severance agreements not only provide peace of mind for the organization that litigation risk has been minimized. They can also benefit leaving employees by providing a financial cushion between jobs and create a more favorable last impression of the organization.

Severance agreements come in many forms and under many titles: letter agreements; severance, termination, or separation agreements; and releases, waivers, or covenants not to sue. A severance agreement, like all contracts, must be supported by consideration. Consideration offered to the leaving employee in exchange for the waiver of the right to sue must be something above and beyond any benefits or payments already owed, such as pensions or accrued vacation and sick leave. If an employment contract requires a certain amount of severance pay, the organization must provide additional payment above and beyond the contractual sum to support the waiver of the right to sue.

To be valid, the leaving employee’s waiver of the right to sue must be "knowing and voluntary.” Severance agreements should be clearly written and avoid technical or legal jargon and long, complex sentences. A waiver cannot include future rights or claims that may arise after the agreement is executed because those rights or claims are not yet known.

A waiver of the right to bring an age discrimination claim must comply with certain statutory requirements to be "knowing and voluntary” under the Age Discrimination in Employment Act of 1967. A waiver of claims under the ADEA must:

29 U.S.C. § 626(f). The consideration and revocation periods under the ADEA can add complexity to the process, so be sure to start negotiations for severance early with employees aged 40 or older.

In addition to a release of claims, consider including the following terms in your next severance agreement:

Finally, don’t be discouraged by a leaving employee who wants to negotiate his or her severance agreement. An employee with a voice in drafting the terms of the severance agreement is more likely to leave with a favorable impression of the organization. Negotiation is also strong evidence of a knowing and voluntary release, making the final agreement more likely to be upheld in court if challenged. Consider terms other than payment terms as bargaining chips. Often, pro-employee clauses, such as not contesting unemployment benefits or departing from the typical neutral reference policy, can help finalize negotiations and cement your organization’s reputation for being fair and reasonable.

Properly negotiated and drafted, severance agreements are "win-win” for the organization and the leaving employee, both reducing legal risk and preserving your organization’s reputation.

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