Employers often find it difficult to justify, practically or emotionally, paying severance to an employee being terminated for cause. After all, employers ask, why compensate and reward a worker who broke the rules? It may be easier when the separation is a layoff, yet even under these circumstances, the company’s financial condition may constrain its ability to offer money to a separating employee, getting nothing but goodwill in return.
This Employment Law Bulletin briefly discusses severance and its primary justification: obtaining a release of any future employment law-based claims. We explain why best practices dictate employers set emotions aside in order to secure the protection provided by a release in exchange for a severance payment. We also discuss important issues related to the drafting and implementation of an enforceable severance agreement.
Why Offer Severance
There are sundry reasons an employer may want to offer severance to a separating employee: to reward a worker for years of loyalty; to cushion the blow of an unexpected layoff; to maintain goodwill in the community; or to preserve standing as a competitive, quality employer in the industry.
These are all sound reasons. They explain why employers might consider offering severance in many instances. But the single best reason why employers should offer severance to every terminated employee (i.e., one who is not leaving by her own volition) is the protection that a severance payment, combined with a well-drafted severance agreement, provides against a future claim or lawsuit.
Let’s begin by defining “severance.” In order to support a binding agreement in which the employee waives any claims, the severance must be compensation to which the employee wasn’t already entitled by virtue of her employment. Many employers we work with are surprised to learn that severance does not need to equal several months’ or even several weeks’ pay. This can be a particularly helpful point when considering offering severance to an employee terminated for lying or theft. The investment can be minimal. The peace purchased for merely a few hundred dollars (or less!) is always well worth the investment.
What Severance Buys You
Provided the agreement is properly drafted, signed and otherwise enforceable, the severance payment purchases a promise by the separating employee that she will not bring any claim or lawsuit, in a court or with a government agency, arising out of the employment relationship. Our typical California severance agreement expressly protects against seventeen (17) separate common law causes of action, as well as claims that could potentially be brought under eighteen (18) separate state and federal statutory schemes and regulations.
In fact, the only employment-related claim that cannot be expressly released by way of a severance agreement is one for unpaid wages, which can include reimbursement of expenses, overtime and waiting time penalties. Perhaps most importantly, most reasonably competent lawyers will abandon a claim, regardless of its apparent merits, where a potential client has signed an enforceable severance agreement with the former employer. In this way, for an investment of as little as a few hundred dollars, an employer can avoid incurring attorney’s fees and costs fighting a spurious claim.
The Elements of an Enforceable Severance Agreement
We cannot overstate the importance of having a knowledgeable employment law attorney draft your severance agreement. A severance agreement is a contract. In addition to pitfalls common to every type of contract, there are crucial drafting considerations unique to a severance agreement. This is particularly true if the separating employee is over 40-years-old. An agreement waiving any claims under the Older Workers’ Benefit Protection Act (“OWBPA”) must meet eight (8) statutory requirements, including providing the separating worker a 21-45 day period within which to consider the Agreement before signing it. Even then, the employee has seven (7) days to revoke the agreement. If the employer pays the severance before the expiration of the 7-day period, and the employee revokes the agreement, she may keep the payment and the employer is without recourse to recoup the funds!
In addition to an explicit waiver of any claims that could be brought under federal, state, common law, county, city or local ordinances, a severance agreement can and should provide other protections. Among these, we recommend clauses requiring confidentiality of the severance and prohibiting future disparagement of the employer and its management. It is generally a good idea also to include a clause in which the employee agrees not to apply for employment at any future time; this protects against future claims of discrimination in hiring.
The employee should never be pressured to sign the severance agreement, or to sign it “right away,” as this can provide a duress defense which may undermine the effectiveness of the agreement. It is also a good idea to include a severability clause so that, if an issue arises, a court can later “sever” out any portions of the agreement that are unlawful, rather than rendering the entire agreement unenforceable. A merger clause is also advisable, to prevent a terminated employee from claiming additional terms that are not included on the agreement itself.
Conclusion
California employers should always consider offering a severance when terminating an employee, provided the employee signs a well-drafted severance agreement waiving any claims arising out of the employment relationship. The severance payment need not be sizeable. However, it is crucial that the agreement be drafted properly. Employers with lingering questions should not hesitate to contact their experienced employment law counsel.
Not everyone is cut out to play the boss. While I suspect there are a few sadists who actually enjoy the act of firing an employee, most people hate delivering bad news and learning you’re now jobless usually ranks near the top of the bad news heap.
From the point of view of a lawyer who represents employers in lawsuits, however, I view the process of termination to be extremely important. It can be tempting, when one is forced to deliver the news, to sugarcoat. Most sugar-coating doesn’t really make anyone feel better. For example, “you’ll always be part of the family,” or “you’ll thank me someday for this chance at a fresh start,” might have worked for George Clooney in “Up In The Air,” but it’s a pretty stupid thing to say in the real world.
One brand of sugar-coating that can be really dangerous concerns mischaracterizing a termination for poor work performance as something other than what it is. In particular, suggesting a sub-par employee is being “laid off” creates substantial risk. If the “redundant” employee is replaced anytime in the near future, it sets the stage for him or her to argue, in a subsequent discrimination lawsuit, that the lack of work was merely a pretext. That the actual goal was to eliminate the employee on the basis of some protected characteristic (i.e., race, gender, disability, religion). This kind of evidence plays well at trial: like all of us, jurors love to hear about conspiracies and cover-ups.
One way for employers to make the act of termination less of a surprise–and therefore less painful for everyone involved–is to make termination the final step in a progressive discipline policy. Implementing such a policy starts with a frank discussion with the underperforming employee that is documented by a dated, written record of the discussion. This type of discussion does not even need to be characterized as discipline, but rather a coaching tool.
If verbal discussions (documented) do not improve performance, the next step should be a written notice that describes the problem, proposes a solution and is provided to the employee concurrently with the verbal discussion. The employee should be asked to sign this document, and perhaps there will be a space dedicated for any response the employee might have. lf the problem persists, the possibility of one or more additional written notices/warnings can be provided, but the message communicated should be that, after a defined number of written notices/warnings, termination will result.
A progressive, documented discipline policy serves two really important purposes. For me–your lawyer–it is important evidence if a wrongful termination or other lawsuit results from the employment relationship or termination. Perhaps more importantly, though, it gives the employee every chance to succeed.