When employers decide to part ways with employees, they often choose the route of offering up a severance agreement.
A severance agreement is a contract that provides departing employees with extra benefits (such as a lump sum monetary payment), typically in exchange for a release of liability.
A properly drafted severance agreement provides several valuable benefits for employers: It shows goodwill and respect for the employee, and it likely reduces the odds that they will file a claim against their former employer after they leave.
But there are also several pitfalls to avoid when putting a severance agreement together. Here are five that can lead to big headaches for employers.
1. The agreement purports to waive existing rights that cannot be waived.
One of the employer’s main goals with respect to severance agreements is to insulate itself from future litigation by the employee to the greatest possible extent.
But that does not mean the employer can extract an agreement from the employee to completely waive any and all legal rights the employee has.
This is because, according to the EEOC, there are certain rights that simply cannot be waived. These include the right to file a charge with the agency and the right to testify, assist or participate in any hearing or other EEOC proceeding involving a federal employment discrimination law it enforces.
“Any provision in a waiver that attempts to waive these rights is invalid and unenforceable,” the EEOC advises.
2. The agreement says it waives claims that may arise in the future.
A waiver of rights and claims included within a severance agreement may not include rights and claims that might arise after the agreement’s execution.
This means that if new acts of discrimination take place after the agreement is signed, the agreement does not block claims based on those new acts.
This fact creates a potential pitfall for employers who want to get a signed agreement in hand as soon as possible. Getting that signature before an employee’s last day of work means that if anything goes wrong in the intervening time – that is, the time between the signature date and the employee’s last day on the job – the waiver does not apply to that period of time.
To avoid issues and gain the greatest benefit from the release of claims, employers can either secure the signature on the employee’s last day of work or make the payment of severance benefits contingent on the employee’s future execution of an addendum that releases all potential claims against it.
3. The agreement does not follow the special rules that apply in cases involving older workers.
In all cases involving severance agreement waivers, a waiver is not valid unless the employee “knowingly and voluntarily” consents to the waiver. This essentially means what it says: A waiver is not valid unless the employee understands what it says and signs it on a voluntary basis.
A federal law called the Older Workers Benefit Protection Act sets specific requirements that apply to make sure any release of claims signed by a worker who is age 40 or older was made knowingly and voluntarily.
To satisfy these requirements, a waiver for older workers must:
- Be written in a way that can be clearly understood.
- Specifically refer to rights or claims that may arise under the federal Age Discrimination in Employment Act.
- Advise the employee in writing to consult with an attorney.
- Give the employee at least 21 days to consider the agreement.
- Give the employee seven days to revoke their signature after signing.
- Not include rights and claims that may arise after the agreement is executed.
- Be supported by adequate consideration — meaning that in exchange for signing, the employee is getting something to which they are not already entitled.
In addition, employers cannot use fraud or undue influence to secure a waiver of claims, and the agreement cannot include an important mistake, omission or misstatement.
4. The agreement includes overly broad non-disparagement or confidentiality provisions.
In February of 2023, the National Labor Relations Board issued a decision that severely curtails the ability of employers to include non-disparagement and confidentiality provisions in severance agreements offered to non-supervisory employees.
In the decision, the board said that such provisions may not be structured in a way that causes them to interfere with the exercise of rights granted to employees by the National Labor Relations Act (NLRA).
The board said a provision that comprehensively banned any statement regarding a labor issue, dispute, or term or condition of employment was invalid. So was a confidentiality provision that effectively banned employees from revealing even unlawful agreement provisions, the ruling said.
Because of this development, all severance agreements should include a statement that nothing in them should be construed to stop the employee from engaging in activities protected by the NLRA.
In addition, non-disparagement and confidentiality provisions in severance agreements need to be narrowly tailored. For example, such provisions may prohibit defamatory statements and the disclosure of trade secrets.
5. The agreement does not adequately account for applicable state or local laws.
Severance agreements must be crafted with careful attention to potentially applicable state and local laws that may impact them or the termination process more broadly. For example, states have varying laws regarding the employer’s deadline for delivering a final paycheck to the employee. State-law considerations also come into play with respect to the waiver of claims for workers’ compensation and unemployment benefits.
Severance agreements are a common and valuable tool for employers – as long as they are careful to avoid all the potential pitfalls that come with them.