Severance agreements are a common tool used by employers to provide financial compensation and benefits to employees when they leave a company, whether due to layoffs, restructuring, or mutual agreement. While these agreements can provide protection and clarity for both parties, ensuring that a severance agreement is enforceable is crucial for employers. If a severance agreement is not properly drafted or fails to comply with legal requirements, it can be challenged in court, leaving the employer exposed to potential litigation.
At Eko Law, we specialize in helping businesses navigate the complexities of employment law, including drafting and enforcing severance agreements. In this blog post, we’ll discuss the key considerations for ensuring your severance agreements are enforceable, protecting your business from potential legal disputes.
What is a Severance Agreement?
A severance agreement is a legal contract between an employer and an employee that outlines the terms and conditions under which the employee will receive severance pay or benefits upon leaving the company. These agreements are typically used during layoffs, terminations, or voluntary separations and often include compensation in exchange for the employee waiving certain rights, such as the right to sue the employer for wrongful termination or discrimination.
Severance agreements can benefit both parties. For the employee, they provide financial security and clarity regarding benefits during the transition period. For the employer, a well-drafted severance agreement can help mitigate the risk of legal disputes and protect the company’s interests.
Key Considerations for Enforceable Severance Agreements
To ensure that your severance agreement is enforceable, it’s essential to address several key factors. Failure to properly draft or execute the agreement can render it invalid or subject to legal challenges. Here are some important considerations to keep in mind:
1. Compliance with Employment Laws
One of the most critical aspects of an enforceable severance agreement is compliance with relevant employment laws. Severance agreements must adhere to federal, state, and local employment laws to be considered valid.
Federal Laws
- Age Discrimination in Employment Act (ADEA): If the employee being terminated is over 40 years old, the severance agreement must comply with the ADEA, which protects older employees from age discrimination. Specifically, the agreement must include a 21-day consideration period for the employee to review the agreement and a 7-day revocation period after signing. Additionally, the agreement must contain language that explicitly mentions the waiver of age discrimination claims under the ADEA.
- Fair Labor Standards Act (FLSA): The severance agreement should comply with the FLSA’s requirements regarding wage and hour laws. Employers must ensure that any unpaid wages, including overtime, are settled in the agreement.
State and Local Laws
- Each state and locality may have additional requirements or restrictions related to severance agreements, such as provisions related to non-compete clauses, payment timing, or confidentiality agreements. Employers must review state-specific laws to ensure the severance agreement complies with local regulations.
Failing to meet these legal requirements can result in the severance agreement being deemed unenforceable, leaving the employer vulnerable to potential lawsuits from the employee.
2. Clear and Unambiguous Language
Clarity is key to making a severance agreement enforceable. The agreement should be written in plain, straightforward language that both parties can understand. Legal jargon or vague terms can lead to confusion and disputes over the interpretation of the agreement’s provisions.
Key Elements to Include:
- Compensation Details: Clearly outline the severance package, including the amount of severance pay, any continuation of benefits, and the payment schedule. Ensure that all compensation is specified in detail to avoid misunderstandings.
- Waiver of Claims: The agreement should include a clear waiver of claims, in which the employee agrees not to pursue legal action against the employer for specific claims, such as wrongful termination, discrimination, or breach of contract.
- Confidentiality Provisions: If confidentiality is required, such as prohibiting the employee from disclosing the terms of the severance agreement or sharing proprietary information, the language should be specific and enforceable under state law.
- Non-Compete and Non-Solicitation Clauses: If applicable, include clear and reasonable non-compete and non-solicitation clauses that comply with state laws. These provisions should specify the geographic area, duration, and scope of the restrictions.
By ensuring that the severance agreement is clearly written and easy to understand, employers can reduce the likelihood of disputes over the terms of the agreement.
3. Voluntariness and Consideration
For a severance agreement to be enforceable, it must be entered into voluntarily by both parties. The employee should not feel pressured or coerced into signing the agreement, as this could invalidate the contract.
Voluntariness:
To demonstrate that the agreement was signed voluntarily, employers should provide the employee with sufficient time to review the document and seek legal advice if desired. As mentioned earlier, under the ADEA, employees over the age of 40 must be given 21 days to consider the agreement. Providing this time for review can help ensure that the employee’s consent is truly voluntary.
Consideration:
In legal terms, “consideration” refers to something of value exchanged between the parties. In a severance agreement, the employee typically receives severance pay or benefits in exchange for waiving their right to sue the employer. The consideration must be something the employee is not already entitled to; otherwise, the agreement may not be enforceable. For example, if an employee is already contractually entitled to severance pay, the employer must offer additional compensation or benefits for the waiver of claims.
4. Addressing Potential Claims and Disputes
A comprehensive severance agreement should address potential claims and disputes that may arise after the employee leaves the company. This includes specifying which claims are waived by the employee, such as claims related to discrimination, wrongful termination, or unpaid wages.
Release of Claims:
The release of claims section should clearly state that the employee agrees to release the employer from liability for any claims arising from their employment or termination, except for those claims that cannot legally be waived (e.g., workers’ compensation claims). This release should cover all potential claims, including those under federal and state laws.
Dispute Resolution:
Including a dispute resolution provision in the severance agreement can help protect both parties in case of future disagreements. This provision may specify that any disputes arising from the agreement will be resolved through arbitration or mediation, rather than through costly litigation.
5. Documentation and Signatures
For a severance agreement to be enforceable, it must be properly documented and signed by both parties. The agreement should be in writing and include the signatures of the employee and an authorized representative of the company. Additionally, the date of the signing should be clearly indicated.
If the agreement includes a revocation period, such as the 7-day period required under the ADEA, ensure that the employee is aware of this and that the agreement does not become effective until the revocation period has passed.
Schedule Your Legal Consultation Today with Eko Law
Severance agreements are valuable tools for employers to protect their business interests and avoid potential legal disputes. However, ensuring that these agreements are enforceable requires careful attention to legal requirements, clarity, and fairness. At Eko Law, we help businesses draft and enforce severance agreements that comply with the law and protect both the employer and the employee.
If you need assistance with drafting or reviewing a severance agreement, contact Eko Law today. Our experienced team of employment law attorneys can guide you through the process, ensuring that your severance agreements are enforceable and that your business is protected.
