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Severance and Separation Agreements The Dos and Don’ts of Drafting Effective Severance and Separation Agreements.

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Presentation on theme: "Severance and Separation Agreements The Dos and Don’ts of Drafting Effective Severance and Separation Agreements."— Presentation transcript:

1 Severance and Separation Agreements The Dos and Don’ts of Drafting Effective Severance and Separation Agreements

2 Introduction  Severance agreements, also referred to as “termination” or “separation” agreements, are frequently created out of concerns over avoiding future legal claims by employees who will soon be terminated. In exchange for the employee's agreement not to challenge what would have otherwise been an involuntary termination, the employer provides the employee with consideration, usually including payments and/or benefits, to which he or she would not otherwise be entitled.  Such agreements are also helpful in diffusing situations with terminated employees who may be hostile or volatile.

3 When Severance Agreements are Recommended An employer may consider a severance agreement in the following circumstances:  Involuntary termination;  Performance-related termination;  Forced resignation;  Layoffs.

4 Suggested Provisions  Release of all potential claims associated with the employment relationship and its breakup (both known and unknown).  A provision providing that there is no admission of unlawful or wrongful conduct.  A statement that, as of a certain date, the employee has submitted his/her resignation and it has been accepted by the employer.  A statement regarding the parties' wish to ensure that they have resolved any possible disputes or differences associated with or arising from the employee's employment with the company.  Reference to specific statutory claims being released, such as the ADEA and OWBPA. Multi-state issues should also be considered. The OWBPA provisions will be discussed in more detail shortly.

5 Suggested Provisions  Provision governing separation pay, benefit continuation, and tax treatment of the same.  Provision concerning the return of the employer's property.  Provision concerning the content of employment references that will subsequently be provided to prospective employers.  Confidentiality provision.  A prevailing party provision awarding attorneys’ fees in case one party fails to perform.  Provision stating that no changes to the agreement will be accepted unless such changes are in writing.

6 Optional Provisions  Arbitration provision We do not normally suggest including an arbitration provision because, if the agreement is carefully drafted, there is a high likelihood that a court will dismiss the claim and award fees to the prevailing party;  A prohibition on future disparagement of the company;  A confidentiality provision;  A covenant not to sue;  A forum selection clause;

7 Optional Provisions  A choice-of-law provision;  An integration clause;  A statement that the employee is not only releasing claims for all compensation, but also all claims for attorneys' fees and costs. This prevents an employee from making an application to a court for attorneys' fees afterward on the basis that he or she is a “prevailing party”;  An outline of the consideration and the tax consequences (see also Internal Revenue Code §104 and 26 CFR 1.104).

8 Other Important Elements to Consider for Severance Agreements  Provide sufficient consideration in excess of regular payments. In addition, severance pay may be required by a CBA or an employee welfare benefit plan. Consideration may also include health and dental benefits under COBRA.  Include a statement regarding whether or not the employee was represented by or sought the advice of counsel.  Include an affirmation by the employee that he/she has carefully read the agreement and understands it.  Place the statement that says the employee understands he/she is releasing potential claims in bold print.

9 Compliance with EEOC Guidelines  In 1990 Congress enacted Title II of the Older Workers Benefit Protection Act ("OWBPA"), which governs waivers of potential ADEA claims and waivers in settlement of pending EEOC charges or litigation alleging ADEA violations.

10 Wording and Content of OWBPA Waivers  Both individual waivers and waivers as part of an employment termination or exit incentive program must be “knowing” and “voluntary”;  Must be in writing and drafted in plain language, avoiding long, complex sentences and technical jargon;  Must not mislead, misinform, or fail to inform the employee;  Must not exaggerate its benefits or minimize its limitations;  Must refer to the Age Discrimination in Employment Act by name and refer specifically to the rights or claims available thereunder; and  Must advise the employee to consult with an attorney before signing.

11 Consideration and Time Constraints of OWBPA Waiver Agreements  The waiver agreement must be provided in consideration for something of value in addition to what the employee is already entitled to. Greater consideration does not have to be given to employees protected by the ADEA. For example, the same offer can be made to both a 25-year old worker and a 55-year old worker terminated as part of a reduction-in-force.  An employee must be given at least 21 days to consider the agreement, which runs from the date of the employer's final offer (material changes restart the clock).

12 Consideration and Time Constraints of OWBPA Waiver Agreements  If the waiver agreement is offered as part of a group exit incentive or employment termination program (as defined below), employees must be given at least 45 days to consider the agreement A “group” program can be as little as 2 or 3 employees.  An employee may sign before the expiration of the 21 or 45 day period as long as the decision is not the result of threats, coercion or fraud by the employer.  The waiver agreement must not become binding until at least 7 days after execution, during which time the employee may revoke the waiver agreement.

13 Employment Termination Program  An employment termination program exists when an employer offers additional consideration to two or more employees for the signing of a waiver pursuant to: Exit incentive programs – voluntary programs in which a group or class of employees are offered consideration in addition to that to which they are already entitled in exchange for voluntary resignation and the signing of a waiver; Other employment termination programs – generally, programs in which a group or class of employees are involuntarily terminated and offered additional consideration in return for signing a waiver.

14 Exit Incentive Program – Information Required  The employer must inform every employee in the decisional unit from whom a waiver is requested as part of such program of the following: (i) The class, unit or group of individuals covered by the program; (ii) Any eligibility factors for the program; (iii) Any time limits applicable to the program (see the 45 & 7 day rules discussed earlier); (iv) The job titles and ages of all individuals eligible or elected for the program; and (v) The ages of all of the individuals in the same job classification or organizational unit who are not eligible or selected for the program.  The information regarding ages should be broken down in bands not broader than one year.

15 Exit Incentive Program – Information Required  The information should be broken down by the smallest job categories, i.e., grade levels or other subcategories.  If voluntary and involuntary terminations are present in a single disclosure they should be distinguished.  If an involuntary program is enacted in successive increments over time, the information disclosed should be cumulative so later terminees are provided with information on all employees within the decisional unit at the beginning of the program, as well as all employees terminated to date.

16 Litigation with Respect to Severance Agreements  EEOC v. Lockheed Martin Corp. Employee was laid off due to merger and told she would receive severance benefits only “in exchange for” signing a Release of Claims form. Employee refused and filed a charge with the EEOC, arguing that she had a right to receive severance benefits without having to sign a Release of Claims form. She claimed race, gender, and age discrimination and retaliation. The court viewed the employee’s choice as: she could withdraw her EEOC charge, or she could forfeit her severance benefits. Requiring an employee to contractually waive the right to file an EEOC charge in order to receive an employment benefit is discriminatory in nature.

17 Litigation with Respect to Severance Agreements  Burlison v. McDonald’s Corp., 11 th Circuit Employees over the age of forty were terminated and asked to sign a waiver of claims form, which each of them signed. The former employees brought suit for age discrimination, claiming they did not receive the required notice under the OWBPA at the time of termination that includes job titles and ages of all retained and discharged individuals on a nationwide basis. The 11 th Circuit disagreed with the former employees’ argument that the nationwide information would give them a better opportunity to compare ages of those fired within the different units. The Court reasons that the OWBPA does not require pre- termination statistics, and without such information, it would be hard to conclude age discrimination played a role in termination.

18 Practical Considerations for Terminating an Employee  Have two employees/personnel present during the termination meeting;  Give the employee to be terminated the option to resign (unless there is gross misconduct or illegal activity that forms the basis of the termination);  Terminate on a Friday.

19 Thank You

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