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What is a Severance Agreement?

A severance agreement is a contract entered into between a departing employee and the employer, by which the employee agrees not to sue the employer for various employment-related actions, and the employer agrees to give some type of extra compensation to the employee usually money, benefits or both. Other issues may be covered in the severance agreement as well, such as a confidentiality or non-compete agreement, a non-disparagement clause, or the type of reference the employer will give to any inquiries by potential future employers.

It is important to keep in mind that in order for a release of liability in a severance agreement to be enforceable, the employee must receive consideration in exchange for the release. This consideration may consist of money, benefits, or both. Without payment of consideration to the employee, the agreement will not be enforceable. There are also several specific provisions which must be included in the severance agreement in order for the release of liability to be enforceable to prevent claims under the various statutes.

Assuming consideration is paid to the employee, and the severance agreement is properly written, an employer can be released from any liability under: (1) The Civil Rights Act of 1964; (2) Age Discrimination in Employment Act; (3) Section 503 of the federal Rehabilitation Act of 1973; (4) The Americans with Disabilities Act; (5) The federal Fair Labor Standards Act (including the Equal Pay Act); and (6) The federal Family and Medical Leave Act;

Employees should be extremely cautious in signing any documents which the employer asks them to sign at the time of termination or resignation, and should consult an attorney before signing any documents which looks like it might be a release or waiver of any of the employee’s potential claims.

Because some states have specific requirements about what language must go into a release, you should consult an attorney for help in crafting a legal agreement that will meet your needs. Keep in mind the following general considerations:

You must give the employee something in exchange for the release. You are asking the employee to waive the right to sue you, and that right is worth something. This means that if you ordinarily offer a severance package to those employees who are not asked to sign a release, you will have to give something extra to employees who do sign. Specify what you will provide in the release.

Be clear about the rights the employee is waiving. You might state that the employee is waiving any right to sue you for claims arising out of the employment relationship, including the termination of that relationship. In any case, make sure the release is specific enough to forestall any later claim that the employee did not know what it covered and comprehensive enough to cover every claim the employee might conceivably raise..

Avoid any hint of coercion. An employee’s decision to sign a release must be voluntary, or courts will not enforce the release. Don’t threaten or talk tough with your employees to convince them to sign; you won’t be gaining anything if your release gets thrown out of court.

Finally, special rules apply to older workers. If the employee is 40 years of age or older, the Older Workers Benefits Protection Act (OWBPA) dictates what must be included in a release. Among other things, you must give these employees a longer period of time to review the release, allow them to revoke the agreement for a limited time after they sign, and advise them in writing to consult with an attorney.

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