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Employers Should Be Aware of Pitfalls When Entering into Severance Agreements

July 25, 2017

Severance agreements in the workplace have evolved considerably during the last twenty-five years. The idea of severance being paid to an employee only where a company has an established severance plan is no longer a reality. Employers often enter into severance agreements with employees for the sole purpose of obtaining a release from the employee of any claims the employee has against the company. In return for the release, the employer pays a “severance” to the employee.  

Employers entering into severance agreements need to be aware of certain pitfalls that can defeat or erode the purpose of the agreement. These include making sure there is valid consideration for the employee’s release of claims, including required language for a release of claims under the Age Discrimination and Employment Act, understanding the effective date of the release and considering any applicable state laws.

Likely the most important requirement for a severance agreement is that consideration be provided to the employee in return for the employee’s release of claims. That consideration is generally a monetary payment to the employee, referred to in the agreement as a “severance” payment. In order to be consideration for the release, the severance payment must be a benefit to the employee to which the employee is not already entitled. Any monetary sum to which the employee is entitled, for example, the employee’s final paycheck or accrued or unused vacation that is due to the departing employee, will not constitute consideration for the release. Without valid consideration, the release of claims is invalid, even though the employee signs the severance agreement.

For any employee who is 40 years or older, the severance agreement must contain certain requirements set forth in the Age Discrimination in Employment Act (“ADEA”) in order to effectively release any claims under the Act. The Equal Employment Opportunity Commission published a guidance entitled “Understanding Waivers of Discrimination Claims in Employee Severance Agreements” that addresses the EEOC’s position on the validity of releases in severance agreements and provides a detailed description of the ADEA requirements, with corresponding hypotheticals. Employers need to be aware of these requirements, which include specifically referencing claims under the ADEA, advising the employee in writing to consult an attorney before accepting the agreement and providing the employee with at least 21 days to consider the severance offer and seven days to revoke the agreement after executing the agreement. 

Another requirement for severance agreements that can cause an unknowing employer to misstep relates to the effective date of the release of claims. The release itself is only effective through the date the agreement is signed. If an employer has the employee sign the severance agreement before the last day of employment and the employee continues to work, the release will not cover an employer for any event or action that takes place following the execution of the agreement. For this reason, it is important for the employee to sign the release on or after his or her last day working for the employer. In certain circumstances, employers may require the employee to reaffirm the release at a later date by executing a supplemental release, but this procedure requires thoughtful planning and specific language.

It is also worth noting that employers need to be aware of any state laws that may affect the enforceability of a severance agreement. Although neither South Carolina nor North Carolina has specific requirements for severance agreements, both states have laws that require an employer to pay an employee all wages due within a certain time period following the employee’s termination. The employer’s failure to abide by such laws could result in an employee arguing that the employer cannot enforce an otherwise valid severance agreement.

The above topics, as well as other potential pitfalls related to severance agreements, will be discussed during Nexsen Pruet’s webinar “Key Issues in Settling Employment-Related Claims,” scheduled for August 9, 2017.

Our Insights are published as a service to clients and friends. They are intended to be informational and do not constitute legal advice regarding any specific situation.