Employers offer severance agreements to employees for many reasons. In some cases, employees negotiate severance terms as part of their employment agreement. Some employment agreements require the employer to pay specified compensation to the employee if the employee is fired without cause. Key employees often negotiate severance agreements to assure that they will have funds available if they lose their jobs because their employer goes out of business or is sold to a company that wants to replace the company’s executives.

In other cases, employers offer severance agreements to employees to induce them to resign. Employers might offer severance packages when they want to downsize, to eliminate employees with high salaries, or to resolve personality conflicts by ridding themselves of employees they view as troublesome. Severance agreements can give employees an incentive to retire or to find work elsewhere while helping employers eliminate employees without actually firing them.

Finally, employers that plan to fire an employee might offer a severance agreement to reduce the risk of litigation. Avoiding litigation is a key reason that motivates employers to enter into post-employment severance agreements, whether the employee is leaving voluntarily or being fired. 

Benefits to Employees of Severance Agreements

Severance agreements typically promise that an employee will receive extra compensation after employment ends. The compensation might consist of a lump sum payment or a continuing payment of salary for a specified length of time. Additional compensation may include a contribution to a retirement fund, continuing health insurance at the company’s expense, and other benefits for a fixed period of time.

The agreement might describe a formula for computing compensation. The formula is usually tied to the length of the employee’s employment. For example, an employee might receive one week of compensation at the employee’s most recent salary for each year of employment that the employee completed.

Apart from health insurance benefits, most severance compensation is taxable income. Agreements typically require the employer to withhold payroll taxes on compensation. When agreements provide that the employee will be paid on a 1099 basis, they also require the employee to indemnify the employer if the employer is held responsible for unpaid payroll taxes. 

A severance agreement might sound like a good deal. And in some cases, being paid without working for the payment might be a good deal. But every severance agreement comes with a price. Employees should understand that they give up valuable rights when an employer wants to give them severance pay in exchange for ending their employment.

Release of Liability

Employers do not offer severance pay as a gift. They invariably obtain a release of liability in exchange for the severance benefit. By signing the agreement, the employee agrees not to sue the employer for any claim that the employee could have asserted.

Employers often worry that firing an employee might violate (or be perceived as violating) employment laws that prohibit discrimination on the basis of race, national origin, gender and gender identity, disability status, religion, age, or membership in other protected classes. Employers might also worry that they will be sued for a violation of whistleblower statutes, for failing to pay earned bonuses or commissions, or for other injuries to an employee.

A severance agreement that describes the separation from employment as voluntary gives the employer some protection from those claims, but the strongest protection is a release of liability. The release is generally written in the broadest possible language so that the employee releases all possible claims, including claims that the employee has not yet discovered.

The law imposes some limitations on releases, but those limitations are few:

• Employers cannot obtain a valid release of claims for minimum wage or overtime violations because federal law prohibits including those claims in a general release. 

• Releases of age discrimination claims by employees over the age of 40 are only valid if the agreement gives the employee 21 days to think about the agreement before signing it and 7 days to revoke the agreement after signing it. To be valid, the release must notify the employee of his or her right to obtain legal advice before signing the agreement.

• Depending on state law, a general release might be insufficient to resolve a workers’ compensation claim that is not specifically referenced in the agreement or approved by a workers’ compensation judge.

• Releases generally apply only to claims based on acts that have already occurred. They do not apply to harms that an employer causes after the agreement is signed.

Some releases might also be invalid because they were obtained by coercion or duress, or because they are so unfair as to be unconscionable. Since it is rare for a court to set aside a release on those grounds, employees should seek legal advice before signing the agreement. Signing it and hoping to challenge it later is not a smart strategy.

Confidentiality and Non-Disparagement Agreements

Severance agreements almost always include a confidentiality clause. As a condition of receiving severance pay, the employee cannot tell anyone how much severance pay he or she received. In most cases, employees cannot even tell anyone (other than their lawyers and tax advisers) that the agreement exists.

Most confidentiality agreements also prohibit employees from disclosing certain information they learned during their employment, including trade secrets and other information that the employer defines as confidential. Price lists, customer lists, suppliers, the company’s financial condition, and similar information is usually defined as confidential. 

Non-disparagement agreements prevent the employee from making negative remarks about the employer. If an employee complains to other employees that he or she was treated unfairly by the employer, the employer may be entitled to take back the severance pay and to pursue damages. Typical violations of non-disparagement clauses occur when an employee speaks to the media or posts statements on social media that criticize the former employer.

Non-Compete and Non-Solicitation Agreements

Many states, including Florida, permit employers and employees to enter into non-compete agreements. The agreement provides that the employee will not accept employment with a competing business for a specified length of time within a specified trade or geographic area. 

When an employer wants to subject an employee to a non-compete agreement, it usually does so when employment begins or when the employee has been promoted to a position that might give the employee experience that would benefit a competitor. The non-compete clause in a severance agreement is often a restatement of an agreement that the employee already made. Employees should nevertheless take care to understand whether the noncompete clause imposes new or broader restrictions than the agreement that the employee previously made.

Non-compete agreements are usually combined with non-solicitation agreements. Those agreements restrict the former employee’s ability to solicit the company’s customers or to ask its current employees to join the former employee in a new or different business.

Employer’s Remedies

Most agreements require employees to repay the severance benefit if they breach the agreement. Employees might also be required to pay the employer’s attorneys’ fees if they are found liable for a breach. An employee might therefore be at risk of returning severance pay and of paying a large attorneys’ fee if the employee violates the terms of the agreement.

Some severance agreements specify the place where any lawsuit concerning a breach of the agreement must be heard. They might also specify the state law that should govern the lawsuit. For example, if a New York corporation enters into a severance agreement with an employee of its Florida office, the agreement might specify that any lawsuit relating to the agreement must be filed in New York and will be governed by New York law. Employers often designate an inconvenient forum to create a disadvantage for former employees.

The Importance of Legal Advice

In many cases, a severance agreement will benefit an employee. Having extra money at the end of employment can be useful as the employee searches for a new job. In other cases, the amount of money the employee receives does not justify the loss of rights that the agreement demands.

Employees who are presented with a severance agreement should seek immediate legal advice. Employees who are over the age of 40 must be given time to consult with a lawyer if the agreement includes a general release. When a younger employee is told “sign it now or we’ll fire you without paying severance,” the employee might suspect that the employer has done something unlawful and desperately wants to obtain a release of liability. That situation is uncommon, but when it occurs, the employee has a difficult choice. An employee who anticipates that a termination is coming might want to talk to a lawyer about the appropriate response to a severance agreement.

When an employee has the opportunity to seek legal advice, it can be beneficial to do so. Severance agreements are binding contracts. Their terms may be difficult to understand. Before an employee agrees to release potential claims against an employer, the employee should know what he or she is giving up. Employers too often take advantage of employees who do not understand what they are losing by signing the agreement.

A lawyer will ask questions to determine whether claims against the employer might exist, whether they have merit, and whether the severance benefit is sufficient to make the release of those claims worthwhile. A lawyer who identifies potential claims may be able to negotiate a better payment in exchange for the release of those claims. Without obtaining legal advice, employees may never realize that it would be better for them to pursue a wrongful discharge lawsuit or other claims against the employer, or to negotiate a larger severance payment.