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What You Need To Know About Severance Agreements

What Is a Severance Agreement?

A severance agreement or a separation agreement is a legal contract between an employer and an employee that documents the rights and responsibilities of both parties upon and after the termination of the employment relationship.

Although the content of severance agreements might vary, they often outline the obligations of both the employer and employee during the employee’s termination. A severance agreement often provides for post-employment benefits, such as pay, continuation of health or other insurance, and job placement assistance  and  what the employee needs to do or not do to receive those beenfits.

In order for the severance agreement to be binding, both the employee and an authorized representative of the employer must agree to each of the terms. The best way to ensure that a severance agreement will be binding is to have the agreement in writing and signed (or e-signed) by the employee and an authorized representative of the employer.

Whether you are an employer or an employee, it is essential that you understand how severance agreements work. In this article, we examine severance agreements and answer the question, “is a severance agreement just free money?

Importance of Severance Agreements

Many business require their soon-to-be former employees, whether they are resigning or have been fired, to sign severance agreements to avoid problems and protect their interests.

No Florida state or federal law requires an employer to pay an employee beyond their wages, commissions, or non-discretionary bonuses earned. So, unless required by an employment agreement or collective bargaining agreement, Florida law does not require employers to provide severance or separation pay upon termination of an employee.

Consequently, severance payments usually require an employee to agree to certain conditions. The severance agreement specifies the employee’s severance pay and other benefits and ensures that the employee agrees with the terms of their termination.

By signing a severance agreement, an employee normally agrees to waive and forever release certain claims they may have against the employer relating to their employment or departure from the company. As a result of this waiver and release, the employer is protected from most types of potential legal action by the employee. The law does not allow an employer to agree with an employee to waive certain types of claims or to forbid an employee from making certain types of complaints, although a carefully drafted severance agreement will minimize the effects of any permissible claim by a disgruntled employee. 

A severance agreement is intended to provide both the employer and the employee with certainty as to the future by entering into a binding contract. Some employers offer their severance agreements with no room for negotiation, while others are open to negotiate the terms. A carefully drafted and mutually agreeable severance agreement can benefit both parties by avoiding future disagreements or litigation. 

Common Components of a Severance Agreement

Since severance pay is not a legal requirement in Florida, there is no specific severance agreement template employers must use. In most cases, however, the following components are included in these agreements.

Severance Benefits

The agreement must set out the exact amount of money the employer will pay to the employee. This compensation may consist of a lump sum severance payment or a continuance of wages for a specific period.

The Fair Labor Standards Act (FLSA) does not offer any guidelines for severance pay. As a result, severance payment amounts and policies vary from organization to organization and by employee position. The FLSA does not allow an employer to have an employee effectively waive or release any claims for unpaid overtime or minimum wages, although creative solutions may exist to circumvent this general prohibition.

Companies can include unused vacation time, sick days, and other paid time off (PTO) as part of their severance packages, either as a lump sum or as salary continuation payments. Some companies have policies or agreements that require the payment of unused PTO, while others provide that unused PTO is forfeited under certain circumstances. Therefore, it is important to review any applicable employment agreement, company handbook, policies, and procedures before signing for any severance package.

Instead of negotiating severance packages individually, companies with preexisting policies may apply uniform terms.

Insurance Coverage

According to the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA), companies who had at least 20 employees on more than 50% of its typical business days in the previous year must allow workers who resign or are dismissed to remain covered under the employer’s health insurance plan for 18 months after they leave their employment. While the COBRA Act mandates that employers provide this continued insurance coverage, it is usually offered at the employee’s expense.

As part of the severance package, the company can agree to pay the employee’s share of the COBRA premiums for a specific number of months, allowing the former employee to continue receiving health insurance benefits throughout a specified time during their job search.

Apart from medical insurance, severance packages can also include disability and life insurance benefits.

Confidentiality Clause

Some corporations keep their severance agreements secret, so the employee cannot disclose its terms after signing.

A confidentiality clause in the employment contract may prevent the employee from disclosing information learned during employment to protect the company’s trade secrets, intellectual property rights, and reputation.

It is common for confidentiality clauses to outline the consequences of disclosure of prohibited information.

If an employee did not sign an employment agreement that contained a sufficient confidentiality or non-disclosure agreement, a severance agreement can accomplish the same goals by requiring an employee to maintain as confidential certain information, including the existence of the severance agreement, and identify the penalties for unauthorized disclosures. These penalties serve as both a deterrent and to avoid future conftroversies.

Post-Employment Obligations

A severance agreement can include a restraint of trade that prohibits the employee from working for a rival or recruiting the employer’s clients or employees after leaving the company for a specified period of time and geographic area.

An employee may be required to assist their (former) employer in transitioning their job duties to another employee as part of a severance agreement. By doing so, the company can help create a seamless transition between employees and minimize business disruptions.

Employees may also be required to return company equipment under the separation agreement in order to receive the benefits, specifying what equipment and information is to be returned, where, and when.

ADEA-Related Information

Employees over the age of 40 must be informed of their legal rights in terms of the Age Discrimination in Employment Act (ADEA) in a severance agreement.

Can You Require a Fired Employee To Sign a Severance Agreement on the Spot?

The answer to this question depends on the age of the employee. Generally speaking, if the employee is younger than 40, yes. But, if the employee is over 40, then the answer is no. The Older Workers Benefit Protection Act provides that an employee over 40 cannot be bound by an agreement to give up certain rights that are signed without giving them time to consider and back out of the agreement.

This federal law requires employers to give their employees who are older than 40 years old up to 21 days to consider a separation agreement that releases age-basedclaims and then another 7 days after signing to consider whether to revoke the agreement.

Should Employers Always Offer Severance Packages?

 Employers should weigh the benefits of offering money and benefits, in whatever amount, to a departing employee against the risk of not doing so. Offering a severance agreement to an employee who is terminated for significant misconduct, for instance, may be viewed as improper and rewarding bad behavior.

Typical instances in which severance compensation is necessary include the following:

  • Layoffs
  • Getting rid of a position or division
  • Company reorganization
  • Avoiding litigation with the former employee 

Need Help With a Severance Agreement? FairLaw Firm Is at Your Service

FairLaw Firm’s employer representation lawyers have years of experience creating and negotiating severance agreements. Our team will work with you to create a severance agreement that meets your needs.

Call us now to schedule a free consultation.