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RISK MANAGEMENT

The why, when, and how of a severance agreement and what it needs to cover

A severance agreement can benefit both employer and employee.

On the employer side, it’s an insurance policy against employee litigation. “It thwarts claims by former employees,” says employment law attorney Jonathan B. Orleans of Pullman & Comley in Bridgeport, CT.

And on the employee side, it softens the blow of being without work and tides people over until they can find another job.

But to be effective protection for the office, the agreement has to include a lot of provisions.

What is a severance agreement?

A severance agreement is just what it says – an agreement about severing the relationship.

The office agrees to pay money or benefits the employee wouldn’t otherwise be entitled to, and in exchange, the employee agrees not to file any employment law claims.

Mostly, what the employee agrees not to file are claims of discrimination, wrongful discharge, harassment, retaliation, or breach of contract. There can also be a release for age discrimination claims.

However, Orleans says, there is one element that can’t be covered, and that is unpaid overtime.

Many employers aren’t aware of this and include overtime claims in the agreement. But there’s no point in doing so. Overtime comes under the Fair Labor Standards Act, and the only way to get a release from paying it is with a court order or with approval from the Department of Labor.

The severance agreement can cover other things as well. For example, it might say the employee won’t speak disparagingly of the office or will keep all office information confidential or won’t compete with the practice within a certain geographic area for a certain amount of time.

Who gets one?

There are no rules on who gets severance and who doesn’t, Orleans says. Neither is there any requirement to give it.

The only concern is that it be offered fairly so there’s no chance anybody can argue, for example, that the practice gives it to people under age 40 but not to older employees or that the men routinely get it but the women don’t.

His advice is to set out “some neutral basis” for offering it, and make it available to anybody who fits the criteria.

Usually, agreements are reserved for people who are let go for reasons unrelated to job performance as when a position is terminated or when there’s a reduction in the work force.

But there needs to be some rationale for offering it, he explains. “Don’t just do it willy nilly,” he says, and don’t go overboard “and start throwing money at everybody who walks out the door.” It’s not appropriate for somebody who simply quits or who is fired.

What should it say?

As to what the agreement needs to cover, the safest approach, Orleans says, is to follow the requirements of the Age Discrimination in Employment Act (ADEA).

The ADEA was set up “to keep old people from being bamboozled and getting their arms twisted,” he explains.

It covers people age 40 and older and only applies to employers with 20 or more employees. But following it is good practice, because if an employee comes back and claims “this wasn’t really voluntary” or “I didn’t want this,” the office has proof that it made sure the employee understood everything and gave that person ample time to consider the agreement and even more time to back out of it.

Essentially, the ADEA says the agreement has to be written “in language that’s understandable to the average person.” In other words, it can’t bury people in legal jargon.

The agreement also has to provide something the employee wouldn’t otherwise be entitled to such as additional money or insurance coverage.

The office has to advise the employee to consult a lawyer before signing it. However, Orleans says, the employer isn’t required to provide the legal counsel. The employee pays for that.

There’s also a time allowance.

The manager can’t just put the agreement on the table and make it a now-or-never offer. The employee has to be given 21 days to think about it before signing. And even after it’s signed, there’s a seven-day I’ve-changed-my-mind period during which the employee can back out of it.

How much money is enough?

How much severance money should the office offer?

There’s no law on that, Orleans says. It can be anything – even as little as a dollar more than what the employee would otherwise receive.

However, most employers give one to two weeks’ pay for every year of service, usually with a cap at 12 weeks’ pay. For highly compensated employees, the amount is often a month’s pay for every year of service.

Along with this money, many employers pay the employee’s COBRA premiums.

What should it say?

Make the agreement clear and brief.

Say that the office is giving $X or certain benefits or whatever.

Say that the amount is more than the employee would otherwise be entitled to receive.

And say that in exchange, the employee agrees to waive and release the practice from any employment law claims.

There can be a provision that the employee agrees not to tell anybody how much money the severance package includes. And there can be an agreement not to disparage the office or its patients.

There also needs to be language that the employee was advised to consult with an attorney, has been given 21 days to consider the offer, and has an additional seven days after signing to back out of the agreement.

After the signature, add a statement that the employee has read and understands the agreement. And that too gets a signature.

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