Severance Agreements Explained
One of these documents that some employers use when parting ways with its employees, is known as a severance or separation agreement. This document typically includes various provisions, such as the exact date in which an employee’s employment with the employer ends, the severance pay that will be provided to the employee, a release of claims in favor of the employer by the employee, how the employer will handle any accrued leave or accrued sick time, the return of company property and the continuation of health insurance. Oftentimes, a release of claims will broadly include all known and unknown claims an employee has against the employer, as well as the broad categories of claims such as those claims arising under Title VII and/or the ADEA.
While an employer may view such a clause as creating certainty that all claims are released by an employee, courts have held that such releases contain a "magic language" language so to speak, in order to be effective. In order to be valid, releases of age discrimination claims pursuant to the Age Discrimination in Employment Act ("ADEA") must be written specifically with certain language. Specifically, waiver of these rights must be made knowingly and willingly, and employees must also be given consideration in exchange for signing such waiver (which is oftentimes the severance pay offered) . A waiver of the ADEA must also specifically reference the ADEA, must specifically advise each individual to consult with counsel prior to executing the waiver, and must clearly and understandably advise the employee of the rights that are being waived.
Importantly, the ADEA regulations provide employees a 21-day consideration period, and a 7-day revocation period should the employee change his or her mind. That is, generally, an individual cannot waive his or her rights under the ADEA until he or she has had at least 21 days to consider the separation agreement. That said there is an expedited alternative to the typical waiting period for ADEA waivers. In cases where the employee is represented by counsel, the normal 21 days can be waived, and the severance agreement can be signed quickly.
A separate consideration period specifically with respect to group layoffs was also recently announced by the EEOC. Generally, if an employee is terminated (such as in a group layoff), the employer must give you sufficient time to consider the severance agreement or release that it is providing. The EEOC generally recommends at least 45 days. An exception to this general rule is for group layoffs, in which case 45 days is the statutory minimum.
Reasons an Employer May Not Honor a Severance Agreement
Employers hire severance agreements and they expect employees to comply with them. Conversely, employees expect their employers to keep their end of the bargain and pay them a severance package as promised. Unfortunately, employers sometimes do not honor these contracts. There are a few common reasons why this occurs.
Most often, an employer will try to cheat an employee out of severance if the company experiences financial problems or bankruptcy. For-profit companies have one goal: making money. If a company begins to suffer financially or loses its main source of revenue, it may simply not have the means to pay severance to a large number of employees. In these situations, you may be able to argue for severance in court.
For instance, if your company was recently acquired, you may have worries about your compensation. Employers may run into trouble with their severance agreements if they do not follow the legal procedures required after a merger, such as providing notice of the merger or making sure all employees have signed new contracts. If there is a problem with your severance payment due to a merger, you can work with an attorney to find out if you are still entitled to your severance package.
Another potential issue is that your employer did not clearly define the terms of the contract and what performance it expected from you in exchange for severance. For instance, in some cases it may simply be a misunderstanding over the language of the contract or a misinterpretation of what constitutes an employee violation. In other instances, the employer may have wanted you to sign a termination statement that violated public policy, such as agreeing to not file a workers’ compensation claim. In these situations, you can argue that no reasonable person would have agreed to the terms of the severance and challenge the contract.
Legal Theories Behind Severance Agreements
Legal implications are at the core of severance agreements. When you sign a severance agreement, you are giving up important legal rights to sue your employer for certain reasons. Courts see these as "contracts." And while other contracts like "employment contracts" or "non-compete agreements" are often invalid due to various public policy considerations, courts do not generally apply those same policies to "severance agreements."
Still, you may be able to avoid compliance with a severance agreement where an employer has engaged in fraud or duress. Courts will invalidate an agreement if one party holds certain information and fails to tell the other party about it, and the new agreement results in hardship or a significant loss to that party.
For example:
Many times, employers will use their own form of severance agreement. In this case, you should look closely at the document. It may be a form with statutes written into it, such as the Worker Adjustment and Retraining Notification Act. This is a federal statute that mandates that employers give adequate notice of lay offs to employees. It will also likely have language regarding waiver of general claims and other generic terms – similar to boilerplate at the end of a lease.
However, there are state and federal laws that prohibit discrimination against employees and prevent them from waiving those rights. For example, an employer cannot discriminate against an employee based on race, gender, age, or disability. Federal law also protects employees with regard to their non-immigrant visa, such as an H-1B visa. Your employer must be careful that it does not ask you questions during the negotiation of a severance agreement that could expose it to liability under one of these laws.
For example, an employer cannot ask how old you are. Even admitting that you are over 40 is dangerous because age discrimination laws prohibit employers from treating workers differently because of their age. Discrimination law also prevents your employer from asking about your disability or marital status.
What To Do When Your Severance Agreement Isn’t Honored
We highly recommend that every employee read their severance agreement carefully. However, it still is possible for companies to refuse to pay severance. If you have not received the compensation requested in a severance agreement, the following steps may help you recover damages:
Review the Agreement
First, be sure to review the severance agreement and understand the exact compensation which you are entitled to receive. If you signed an agreement then your employer is contractually obligated to comply with it. It is also important to know whether or not your employer has grounds to terminate the contract. Common legal reasons include if the employee violated company policies or committed fraud.
Document Communications
Keep track of all communication between yourself and the company about the agreement. Be sure to document any interactions, keep copies of documents, and carefully review everything that you received from the company. Also take note of the names of anyone that you spoke with or who corresponds with you. This information will help your attorney should you need to go to court.
Seek Legal Assistance
Depending on the communication you had with the employer, you may be able to resolve the issue very quickly. If the employer continues to argue with you about the agreement, it may be time to call in an attorney. There are a number of compensation packages that may be offered, so it is a good idea to consult with an attorney to determine whether or not you are being treated fairly.
How to Seek Legal Help
Most employees who have a severance dispute find themselves in contact with their lawyer on a regular basis. There are different ways that applicable attorneys charge fees and consumers should be aware of the various options.
Lawsuits are generally charged by the hour. However, for some types of claims, lawyers may work on a contingency fee basis meaning that they receive a percentage of the recovery as opposed to charging by the hour. In other cases , attorneys may work out a flat fee arrangement with the client.
These arrangements will depend on the type of claim, potential issues, and the complexity of the matter. Contracts are highly individualized and a consumer’s relationship with their lawyer is different than the next consumer as well. That being said, consumers who are looking for representation for a dispute will want to make sure that their lawyer has experience dealing with the same or substantially similar type of claim.
Safeguards for Future Agreements
It is always best to prevent these issues from occurring in the first place. The first step that you should take is to make sure that you completely understand the terms of your severance agreement. You cannot sign something unconditionally and then complain afterwards that you did not read it. If you understand the terms and conditions of the agreement ahead of time, you will now be bound to those terms and conditions.
Your severance agreement is a legal document so you should have it reviewed by an attorney. Ideally, you should retain employment counsel that has experience with severance agreements prior to signing anything. If you are currently in the process of negotiating your severance agreement and you may need an attorney, it is best to not sign anything unconditionally until that attorney has the opportunity to review it. Even if you feel that you can resolve the matter amicably, you still should have it reviewed by an attorney to protect your rights. In the event that you should ever need the services of an attorney, you would now have an additional amount of time to pursue that action in the event that your former employer breaches the terms and conditions of the agreement.
Case Studies
To illustrate some of the common issues that may arise after your last day of employment, here are some real-life examples:
Our pharmaceutical client had a conflict with the staff retirement trustee about the correct calculation of the pro-rata severance cap that determined his retirement package. The trustee believed he was entitled to $1 million based on the initial calculation at the time of signing, although that number was revised downward four years later based on the company’s financial performance. We successfully argued that the downward revision represented the correct severance amount, at which time our client recouped $160,000 of his retirement package.
A leading manufacturer of consumer products hired a new CEO who was unhappy with the severance package of the retiring CEO, who had agreed to a one-year extension upon the retirement agreement’s initial signing. The retiring CEO wanted to uphold the severance deal, and his lawyer asserted that the company was bound to honour it. Instead of litigating, we negotiated a severance settlement in the amount of $700,000, significantly less than the $1.6 million amount claimed by the plaintiff.
A Canadian company terminated an engineer’s employment, offering a severance equivalent to 18 months’ pay, provided he signed a release agreement. The engineer, who had more than 23 years’ service, retained Pallett Valo to negotiate a more favourable package. Using our unique legal and business experience , we negotiated a settlement of 23 months’ pay, plus several other benefits that were additional to what was being offered.
Our corporate client terminated the real estate agent’s services when he failed to secure a leasing deal for its best Toronto property. The agent claimed entitlement to 50 percent of the base rent of the Toronto lease for ten years (rumoured to be between $8-10 million). Our lawyers negotiated a settlement of $1 million.
An employee made allegations of improper conduct against senior company management, requesting confidential documents about the allegations and the company’s investigation of the complaint. This matter was particularly high profile, as the employee was terminated after 10 months of employment as a result of poor performance. We successfully argued that the documents were confidential, and the high-profile nature of the case was not sufficient cause to require disclosure of confidential information.
Our aerospace client terminated the employment of a senior Vice President within an hour of the trust officer’s correspondence to our client requesting prorated severance pay for "deferred compensation". The trust officer stated that the proration period ran from the employee’s termination date until age 65. After recourse to the courts, our legal team showed that the corporation could rely on the termination provision of the plan to avoid payment of pretentious claims.