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Paul Zimmerman

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Parting is Such Sweet Sorrow - Especially With a Severance Package (Part 1 of 2)

Whether severance packages are right for your firm always, sometimes or never, can only be answered by management.

This month’s post is the first in a 2-part series addressing the issue of severance packages, first from the employer’s perspective and then from the employee’s perspective.

In its most basic form, a severance package offers additional compensation to a terminated employee. Many, many years ago, it was common for employers to offer small severance packages without any strings attached. Today, however, the situation is much different, and very few severance packages are offered on an unconditional basis.

So what are the basic elements an employer should look for in a severance package? In no particular order, they are:

A Release of Claims: In such a litigious society, it would almost be foolish to offer a severance payment, large or small, without getting some promise in return. The critical promise to extract from the former employee is a “release” or waiver of all legal claims the individual has or may have against the company. Without a release, the company is simply giving away money. 

But beware. There are a number of issues that can come back to haunt the unwary. To obtain an enforceable release of an age discrimination claim under federal law, a release has to comply with the terms of the Older Worker Benefits Protection Act (“OWBPA”), including:

    • It has to be written in plain English;
    • The individual has to be informed in a separate writing of the right to consult counsel;
    • The individual has to be given at least 21 days to consider the release in an individual termination, or 45 days in the event of a group termination.

A group termination also requires the company to provide demographic data regarding the job title and date of birth of all those in the decisional unit who were selected for the package and those not selected for the package.

Confidentiality: Many employers want to bind the former employee to confidentiality of some kind. In group situations, or those involving an involuntary termination without serious threat of litigation, the confidentiality provision will simply cover the terms of the package.

Some employers also include confidentiality regarding the circumstances of the termination in all cases, while other companies opt to include such a provision only in contentious situations.

Non-disparagement: Whether the termination is contentious or not, many companies insist upon a non-disparagement clause in their favor, obligating the employee to refrain from making any negative or disparaging remarks about the company or its personnel.

Restrictive Covenants: A severance agreement is a good opportunity for the company to remind former employees of their common law obligation to refrain from revealing trade secrets or confidential information. If a written agreement exists, the severance offer presents a good opportunity to remind former employees of their contractual obligation to refrain from competing with or soliciting business away from the company.

If no written agreement exists, but there exists a concern that the individual can possibly harm the company through competition or solicitation, the severance offer is the perfect opportunity to attempt to obtain some protection.

A severance package should not be viewed as a panacea that cures all ills.

First, some legal claims are not subject to a “release” or waiver, and these include claims for unemployment or workers compensation, and claims for vested benefits.

In addition, wage and hour claims may also be subject to additional requirements before a release of claims is deemed valid and enforceable.

Finally, some companies prefer to simply sever the relationship, without additional compensation, and the complications that may arise.

Whether severance packages are right for your firm always, sometimes or never, can only be answered by management.   

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.