Severance and Separation Agreements

1
Severance and Separation Agreements

• The Dos and Donts 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 employees 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. McDonalds Corp., 11th 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 11th 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