What is a Severance Agreement?
The severance agreement is a contract, generally between one your employer and you, that spells out the terms of your employment termination. It will usually outline the intended payment structure, any additional terms, and what you are giving up as part of the agreement. The goal of the agreement is to separate you and your employer from any future claims or litigation regarding your employment.
An employer may offer a severance agreement for many reasons, but it is not required. In many cases, the employer will see a benefit in reducing the possibility of litigation, and the employee benefitting from the additional payment can make the matter go smoother . It is not uncommon for an employer to offer a severance agreement when they are ready to let you go, but do not want to cite a specific reason for your termination or layoff (such as a "mass layoff"). In these situations, there is a conflict between what the employer wants — to avoid a wrongful termination law suit — and what you want — to know why you are being fired.
It is important to note that severance agreements are different from severance pay, which is the money that you receive from your employer after you are terminated. Severance pay may be awarded if you are terminated by an employer, but do not sign a severance agreement.
How Are Those 40 and Over A Little Different
Workers over 40 enjoy particular legal protections beyond those available to younger employees. The Age Discrimination in Employment Act (ADEA), which went into effect in 1968, makes it illegal to discriminate against anyone on the basis of age when that individual is over 40. This means that issues of age and employment generally intersect when a member of the protected group – meaning anyone over 40 years old – is being laid off, terminated or subjected to any kind of adverse action due to age. These protections also extend to severance agreements, which are contracts under which a terminating employee agrees to give up his or her right to sue in exchange for a severance package from the employer. Specifically, employees over 40 are protected by this statute, which is aimed at preventing discrimination based on age, from signing away this right without knowing enough about the situation to make a well-informed decision. As a result, an employer must include specific language in its severance agreement confirming that the company has complied with the ADEA guidelines. This applies primarily to waivers of age discrimination claims, which is why an employer should always have the right language guaranteeing this compliance included in any severance agreement it uses.
Important Clauses in a Severance Agreement
When you receive a severance agreement, you may see some or all of the following clauses. For employees over 40, it is important to carefully consider how these clauses may limit your rights. Confidentiality clauses can prevent you from disclosing the circumstances surrounding your termination, and can prevent you from talking to co-workers about their severance offers. Non-compete clauses can restrict where you can work next, and may impact your ability to find new work depending on the area that you are restricted from competing in. A release clause signed in a severance agreement will cut off your rights to claim damages in court, as you will be required to agree that your employer has no further liability to you. If you are over age 40, your employer must also inform you about the impact of the release on your rights.
The OWBPA and How it Applies
You don’t have to be at Akin Gump, Baker Botts or Chamberlain Hrdlicka to know that severance agreements for employees over 40 are tightly regulated. The Older Workers Benefit Protection Act provides a lot of the rules about what must be in a severance agreement for someone over 40, how it must be written, and when the agreement can be signed (basically, an employer cannot ask for a release of any claims under the ADEA until after an employment action has "occurred" and cannot ask the employee to waive his or her claims until after the employment action has been communicated to the employee). It also requires the employer to provide the employees with a 21-day "consideration period" from the date the waiver is presented for the employees to read the agreement and consider whether to sign, and a seven day "revocation period" (which can run concurrently with the consideration period).
These are all well-known requirements, especially for an employer who has been doing these for a long time. However, I get asked regularly, "What is the purpose?" In other words, why are those particular timelines put in the law? While only the legislators can tell you for certain, here is why I believe those timelines are written into law.
People over 40 are protected under the ADEA (in addition to the usual rights under the contract or tort law of the state in which they work) from discrimination based on their age above 40. Therefore, the legislated timelines between "employment action" and the request to sign the waiver of claims are designed so that the employee has time to even out the scales between the "employment action" (what your lawyers call the "adverse employment action") and the signing of the release.
By giving a consideration period, it is assumed that the employee will have the time available to review the agreement with friends, family members and/or attorneys to evaluate what potential claims against the employer could be waived in exchange for the payments that might be offered. Basically, if the company has fired me and I have just three weeks to consider all of my potential claims and release that employer, I will be inclined to get a release signed as quickly as possible, before I get counsel and find out that my employer’s actions have possibly violated several laws, and that I might have claims under wrongful termination, breach of contract, disability discrimination, unlawful retaliation, etc. If I have some time to review the facts and the potential claims and the law with a trusted advisor/counsel, I may decide to let the company go down the road of terminating me.
The stated purpose of the revocation period is to give the employee another seven days to have a change of heart. In my experience, this rarely happens unless the employee realizes that the company is really going to fight the potential lawsuit. For example, an employee may decide that he wants to pursue his claim and file rather than release, but then realizes that the company has determined that the termination was lawful, and is willing to fight over that point for a long time in litigation. He then decides that releasing may be the right way to go.
How to Negotiate a Level-Headed Severance Agreement
The primary goal of a severance agreement is to compensate you for the loss of your job. But it can also be an opportunity to negotiate better terms for your settlement. While negotiating tips can work for any employee, those over the age of 40 have an added advantage – the Age Discrimination in Employment Act (ADEA). If you are over 40 and are not chosen for a RIF or layoff, then that partner who just hired you three months ago is going to have some explaining to do about why he suddenly realizes that he "over hired."
Let’s take up some tips for negotiating a fair severance package if you are over 40 and have been targeted for layoff or RIF:
Consult an Experienced Employment Lawyer. Be sure to contact an employment lawyer as soon as you suspect that your layoff may involve the selection of older employees. A good lawyer can help you frame your response and maximize the strength of your argument.
Review Your Company’s Severance Agreement. Read your company’s severance agreement carefully. If compensation for the employees selected in a reduction in force is based on a formula that takes into account seniority with the company, be sure that you have been treated fairly. If the company gives priority to managers (even if those managers have a shorter tenure), ask why. This is a prime opportunity to show discrimination if you uncover a managerial employee with less tenure who is not being released.
Identify Employees Outside of the Protected Age Group. Gather evidence about the ages of employees in positions similar to yours , to show that you have been treated unfairly. Have other employees been selected for layoff who have a substantial amount of tenure with the company? Document these instances as well, so that you have a pattern of discrimination. Again, this is a good reason to consult an experienced employment attorney.
Look at Overtime Practices of Your Company. If employees in your group have an overtime policy that is similar to your own, consider whether the amount you received in overtime was fair. For example, if professional employees in your department were consistently asked to work overtime but you never were and you are now being targeted and another, younger professional has been recently hired, you may be able to make an argument for age discrimination.
Examine the Levels of Similar Employees in Your Company. Look to see whether employees who have the same educational qualifications and work experience as you have similar positions. For example, if your company has a policy of hiring only Ivy League graduates for certain positions, but you were hired into a different and more junior position, and your replacement was hired into an Ivy League position at a higher salary, you may be able to argue that there was something suspect in your company’s hiring practices. Again, this is a good reason to consult an experienced employment attorney.
When You Need to Find an Attorney
When an employee over the age of 40 is presented with a severance agreement, it is usually advised and often times an employer requirement that the employee have at least 21 calendar days in which to review the agreement with an attorney. While under the Age Discrimination in Employment Act (the "ADEA") an employer is required to offer only 21 days to an employee over the age of 40 to review a separation agreement in order to waive their rights under the ADEA, an employer may require that the employee have an attorney review the Agreement prior to signing.
The purpose of reviewing a severance agreement is to ensure that the employee understands his or her rights upon signing the Agreement and is clear as to what rights he or she is waiving and releasing. An agreement can be a two edged sword. An employee may be entitled to some benefits from his or her employer that he or she wants to give up in exchange for something else. If an employee is being terminated because of downsizing and they are actually being permitted to stay on the payroll for an additional period of time, the terms of the severance agreement may be favorable to the employee. The employee needs to understand what is being offered and whether it is worth surrendering claims that he or she may have against the employer. For example, if the employee was wrongfully terminated on grounds of age discrimination, signing a release may mean the employee will no longer have a lawsuit against his or her employer alleging such discrimination and thus the only way the employee may receive any compensation from the employer would be to accept the terms of the severance agreement.
Waiver and Release Provisions
The waiver or release provision typically found in most severance agreements provides that the employee waives all claims that he may have against the employer. The release is pretty comprehensive, and should essentially make the employer "bullet-proof" from any claims by the employee. However, under Federal law, the waiver of certain claims by employees who are over the age of 40 is more complex as the employee must also be given information about the Older Workers Benefit Protection Act (OWBPA).
The most important thing to note about the waiver and release provision with regard to employees over the age of 40 is that they must be given a longer consideration period and revocation period by law. Specifically, in order to protect it’s interests, an employer must give an employee over the age of 40 at least 21 days to consider the agreement. They must also be given seven days after signing the agreement to revoke it in order to protect the employer as a safe harbor from review by the Equal Employment Opportunity Commission (EEOC). This is so important that there is a specific OWBPA model that is used.
Under OPM regulations, employees 40 years of age or older must be provided with particular information in a severance agreement stating that they (1) are knowingly releasing their claims under ADEA; (2) if they so desire , have an opportunity to consult with an attorney of their choice before signing the agreement; (3) have twenty-one (21) days to consider, and after signing, seven (7) days to revoke the agreement; (4) are waiving all rights to file a claim or lawsuit under the ADEA; (5) have up to seven (7) days to revoke the agreement after signing; and (6) have the right to affirmatively revoke their consent to the agreement after the seven (7) day period.
A severance agreement, therefore, should contain the following language: You are hereby advised that you have the right to consult with an attorney of your choosing, at your own expense, prior to executing this Agreement. You are further advised that you have twenty-one (21) days within which to consider this Agreement before executing it. As stated in paragraph ___ above, you have seven (7) days within which to revoke the Agreement after executing it. This means that for a period of seven (7) days you may change your mind about the Agreement, and if you revoke the Agreement the Agreement will have no effect. To revoke the Agreement, you must deliver a written document to [name(s)], which revokes the Agreement, at the following address: [address(es)].
This language will ensure that you comply with the law and the EEOC safe harbor period, and thereby be able to enforce the agreement should a claim ever arise.