Unfortunately, the Coronavirus and COVID-19 layoffs are going to continue. In one survey, 32% of Chief Financial Officers believe that there will be more job cuts. There are a number of surveys that discuss what people will do once restrictions regarding the coronavirus are lifted. One survey found that 57% of people in Seattle will avoid social gatherings once restrictions are lifted. There are a lot of stories out of Texas about restaurants and other businesses that have no customers coming back. Some experts expect a recovery sometime soon and others looking at a recovery in 2 years or so.
With more layoffs expected now is a good time to review the basics of severance agreements.
One thing that many employers fail to do is to create a severance agreement checklist when they are laying off employees. There are a number of items that should be included. A checklist is a great way to make sure that companies have the information that they need to let create the best severance agreement. Here are some provisions that should be considered to include in any severance agreement checklist.
1. Waiver of Liability
All severance agreements normally have a waiver and release of various claims including: Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act (ADA), the Equal Pay Act (EPA), 42 U.S.C. § 1981 (“Section 1981”), Veteran’s Reemployment Rights Act, Employee Retirement Income Security Act, Age Discrimination in Employment Act including the Older Worker’s Benefit Protection Act, and many other statutes such as state statutes.
Some claims cannot be waived such as Workers’ Compensation claims or rights falling under the National Labor Relations Act.
Severance agreements should normally include a waiver of liability and some sort of admission that the employee does not have any claims that they are aware of against the company. This waiver serves as a way to reduce a company’s liability.
2. Company Property Returned
Companies need to make sure that employees return property. Any severance payment should be contingent on the employees returning any files, computers, passwords, and other items that they have taken or have from the company.
Employees should also be required to return any confidential information in any medium including flash drives, passwords, access to dropbox and other accounts on home and other devices. Employers should ideally change passwords after an employee leaves.
3. Confidentiality
Most people want to keep the terms of the agreement secret (both for the employee’s and the company’s sake). Moreover, confidentiality is something that the employer may also be purchasing with the payment that they give to their soon to be former employee. The confidentiality provision usually protects the employer and the employee from revealing issues about each other and the terms of the agreement. The employer would be prohibited from revealing the terms that the employee is leaving under to anyone that asks them (usually a future employer or member of the media).
4. Non-Disparagement
Companies and employees often seek a non-disparagement agreement that prevents both parties from discussing problems in the workplace or with each other. Again, this is beneficial for both employers and employees. Both parties are prohibited from giving negative comments about the other party. For employees, this generally prohibits them from commenting to the media, writing on social media, and engaging in other communication that is negative about the company. For employers, this usually is meant to stop them from making negative comments about an employee to potential future employers.
5. Medical Benefits
Many companies will offer me`dical benefits to employees as an incentive for the employee sign the agreement or as a benefit that that they want departing employees to have. Employers may wish to pay for an employee’s COBRA insurance for a certain period while alerting employees that they will be responsible for COBRA after that period.
6. Older Worker Benefits Protection Act
The Older Worker Benefits Protection Act modified the Age Discrimination in Employment Act that protects workers that are 40 and older. There are some requirements that the OWBPA imposes on any severance agreement.
- It must be in writing.
- The agreement must be drafted in plain language so that the employee signing the agreement can understand it.
- It should not be misleading. Any advantages or disadvantages should be adequately described.
- The waiver must specifically waive rights under the ADEA and OWBPA.
- The agreement cannot waive future claims.
- The agreement must be backed by consideration. The employer must give something of value to the employee in exchange for the agreement.
- Employees must have 21 days to consider the severance offer, or 45 days if more than one employee is laid off as part of a group lay off.
- When the layoff is for a group of employees then the individuals must be informed in writing of the group of individuals that will be laid off, the eligibility factors for the exit program (e.g. voluntary early retirement), the job titles and ages of all employees that are eligible to participate in the lay off or those that are laid off involuntarily, the ages of all employees in the same job/class as the person being laid off that were not eligible for the voluntary layoff or were not selected for the layoff.
- Employees also have 7 days to revoke the severance agreement after signing. The parties cannot waive this time to revoke.
- Employees should also be advised in writing to consult a lawyer before signing the agreement.
Employers are strictly liable when they fail to follow the requirements. An employer either followed it or failed to follow it. There is not much arguing about whether the required steps were in the agreement, so employers should be careful to follow all requirements.
7. Waiver of Future Employment
A severance agreement may need to address whether an employee will be able to join the company in the future and what will happen if they apply. When an employee is being terminated for cause or because of a disagreement with the company, the employer will typically require the employee to waive the right to rejoin the company or apply for jobs at the company.
8. Address Letters of Recommendation
There are usually two purposes to a provision about letters of recommendation and they differ based on the circumstances for the termination of the employee. For employees that had good performance and were not fired for cause, a severance will often say that the employer will provide a detailed letter of recommendation on request. For employees that were terminated for cause or due to some dispute with the company, the provision usually states that the employer will give a letter confirming dates of employment and job title with few other details. Some employers will refuse to do even this.
9. Dispute Resolution
How will disputes between the parties be solved? Will the agreement require claims to go to arbitration or through the court system? Is the agreement going to include a class action waiver that limits class claims? Will the agreement have a jury waiver so that the dispute will be heard by the judge? These are a few of the issues that should be resolved.
10. Tax Issues
Employees should be required to accept and bear all tax consequences for the payment (under most circumstances). Some payments may not be treated as wages and the employer is not able to withhold income taxes for the employee (which should be outlined in the agreement) for these payments.
11. Unemployment
Employers often agree not to contest unemployment. It is often beneficial to not contest a departing employee’s unemployment even when they are being terminated for cause to discourage the employee from filing a claim against the company.
12. Paying Out Vacation
Companies should consider whether they intend to pay out vacation. In may states, PTO must be paid out. Texas does not require companies to pay out any accrued paid time off or other leave. Employers should follow their policies and past practices for paying out vacation.
13. Governing Law and Venue
What state law will apply to the agreement? How will disputes be resolved? Some states allow you to insert a choice of law provision to apply the law of another state to the dispute concerning the agreement. Usually, this occurs when an employer is headquartered in a different state than the state where the employee works, when the employee works in more than one state, or when the employee lives in a different state from where they work. The venue, particular state or federal court or arbitration association and the location of any arbitration, should be outlined in the agreement. There are very specific state laws to follow here so you should consult an attorney.
14. No Admission of Liability
A severance agreement normally includes a clause that the company does not admit liability for anything that may have happened, and the agreement should not be evidence that the company did something wrong.
15. Severability Provision
Agreements should include a provision stating that provisions within the agreement may be removed from the agreement or not enforced if they are unlawful or impermissible. However, the rest of the agreement will remain in force.
16. Liquidated Damages Provision
This is not a necessary part of the agreement. However, many agreements will put some form of liquidated damages that will or could be enforced upon a party that breaks the agreement. Frequently, this is something that the employer seeks to include in the agreement in the event that the employee disparages the company, breaks the confidentiality agreement, or violates other portions of the agreement.
17. Entire Agreement Clause
Severance agreements should contain a statement that the severance agreement encompasses the entire agreement between the parties. Essentially, this provision means that there is no other agreement between the parties. Oftentimes, employers may have separate agreements (e.g. noncompetition agreements) that they wish to continue to enforce and may also be referenced in this section.
18. Statement of Legal Competence
Agreements generally include a provision that the signee has legal competence; they are of sound mind and understand what they are signing.
Conclusion
Severance agreements are an important part of ensuring a smooth departure for both the employees and the companies. In the times of the coronavirus, they are critical to ensure that companies reduce potential liability and to ensure that employees get some payment as their service to a company ends. All companies can benefit from using a severance agreement checklist to ensure that they include all the needed or wanted provisions within their severance agreement.
The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.
The information provided is my own and does not reflect the opinion of my firm or anyone else.