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How to Evaluate Employment Severance and Separation Agreements

At the end of employment, the employer may try and get an employee to sign a separation or severance agreement. This agreement acts as a release of claims against the employer - essentially a promise by the employee to not file a lawsuit against their old employer. In exchange, the employer may offer a financial incentive to the employee, often in the form of a severance payment, so they sign the agreement. The severance and separation agreement is often a standard operating procedure for the business. However, it could also involve a sensitive matter where the company is worried about getting sued.  

For both the employer and the employee, it is important that the language in the severance agreement is clear, so that all parties understand their rights and their obligations under the agreement. For an employee, the severance agreement is a way to negotiate and maximize their final compensation package. For the employer, the severance agreement is a way to close off any further disputes, prevent possible litigation, and protect the company and its brand.

Severance and Separation Agreements in Massachusetts

Some jobs require paying severance under the terms of the employment contract or personnel policies. Other jobs do not require any severance or any additional compensation or payment upon termination. 

Severance packages and separation agreements often go together after an employee is laid-off or loses his or her job. An employee cannot be required or forced to sign a separation agreement and agree to release the employer of liability. If a court sees that the employee was forced or coerced into signing a severance agreement, the court can refuse to enforce the contract. However, there is nothing stopping an employer from offering an incentive, in the form of a severance payment, to compensate the employee for releasing any claims they may have against the company. 

These dynamics make it clear how important these agreements can be for a business. Not only can an enforceable severance agreement stop an employee from filing a lawsuit against the company; it can also contractually obligate a former employee to keep from disclosing sensitive information to business competitors.

What is in a Severance Agreement?

The severance agreement generally lays out what the employee can and cannot do after leaving their job. Common elements of a severance agreement include:

  • A statement that the employee has been paid in full and has received all of the compensation and benefits that they were entitled to receive
  • A description of the severance payment
  • A non-disclosure agreement, often covering the company's trade secrets, any proprietary information that the employee may have had access to, and even the separation agreement, itself
  • Non-compete, non-disparagement, and non-solicitation agreements
  • A release of claims provision, in which the employee agrees not to file a lawsuit against their soon-to-be-former employer for any of a variety of types of legal infraction or wrongdoing, like workplace discrimination, wage and hour law violations, or wrongful discharge
  • Details about how the employer will act when they are contacted for an employment reference
  • A remedies section that outlines what happens if the severance agreement is violated, and which often includes a clawback provision to take back the employee's severance package
  • Any other provisions that are required by federal or Massachusetts employment and contract law

Until the separation agreement is signed, the employer will typically withhold the severance package. Even when severance is required by the employment contract, an employer may increase the severance offer as a way to get the employee to agree to the separation agreement, including increased compensation or extended benefits. 

The severance payment is a critical part of the separation agreement, though. Massachusetts contract law requires an agreement to have "consideration," or the exchange of value, in order to be enforceable. Without consideration, the agreement is not a valid contract. Without the severance payment, no matter how small it is and even if the benefits are not a money payment, the separation agreement is not enforceable. 

Severance Pay

Severance is the compensation or payment provided to an employee after leaving employment. Severance is generally offered when an employee is laid-off due to budget cuts, job elimination, or downsizing. Severance is not as common when an employee is fired or an employee gives notice to leave a job.  

Severance packages typically include:

  • A lump sum payment or a set number of full or partial paychecks
  • Compensation for any unused vacation, personal, or sick time
  • A set duration of continued health insurance coverage, or coverage until the employee gets a new job

The benefit of severance for employees is that it provides some financial support during a transition period before the individual is able to find a new job. However, because severance is being paid in exchange for signing the severance agreement, it does not prevent the employee from receiving any unemployment benefits they may be entitled to receive.

Release of Liability and a Promise Not to Sue

A key component to a severance agreement is the release of liability that prevents the employee from filing a lawsuit against the employer. Even without any specific information or threat about a lawsuit, the employer may still want a waiver of the employee's right to sue as a general protection. Alternatively, the employer may be seeking a separation agreement because of an existing concern, such as a lawsuit for wrongful termination, sexual harassment, or employment discrimination. 

Non-Compete and Nondisclosure Agreements

Nondisclosure and non-compete clauses are common in severance agreements, even when there are similar terms in the original employment contract. Getting another signature on an updated NDA or NCC may also update the employer's protection when the prior agreements were out-of-date or contained unenforceable language. 

WARN Notice After Layoffs

The federal Worker Adjustment and Retraining Notification (WARN) Act and related Massachusetts laws provide workers with required notice when an employer eliminates existing jobs or closes facilities. WARN does allow employees to waive any claims under WARN through offering additional severance pay or extended benefits. However, required severance may not offset WARN damages to serve as pay in lieu of waiver of WARN claims. 

Accepting or Negotiating Severance and Separation Agreements

After an employer tells the employee that their position has been eliminated, they are laid off, or they are being offered a generous severance package to leave the company, they may not be thinking of negotiations. Even when the writing is on the wall, getting notice that you are out of a job can be shocking. Employees can benefit from taking time to think about taking the severance package before agreeing to sign it. 

If the employee has some basis for filing a lawsuit, the employer may be more willing to negotiate the terms of the agreement. Employees who are losing their job can use this as leverage to negotiate a more generous severance package. Even if the employee does not have a very strong claim, the employer may still offer a good deal in severance in order to avoid costly litigation, avoid negative publicity, and protect the inner workings of the business. Employees who worked at the same company for decades or who were in high-level positions are frequently offered generous severance payments in order to convince them to sign separation agreements that keep them from disclosing what they have learned.

However, some employers are not willing to negotiate the terms of a severance and separation agreement. If the employee seeks to change the terms of the agreement or seek more severance, the employer may stick with a “take it or leave it” approach. 

Time to Consider Severance for Older Workers 

Employees who are 40 years of age or older may be asked to agree to a severance package that releases claims for age discrimination. Under the Older Workers Benefit Protection Act, the employer must be given 21 days to consider the agreement. Where a group of employees is involved, the workers may have 45 days to review the agreement. Additionally, even if the worker accepts the severance agreement, he or she has 7 days after to revoke the acceptance.

Severance Agreements for Executives

Executives and management-level employees may have more significant severance packages that are negotiated prior to employment. Severance and separation agreements may also have a lot more at stake than a standard employment agreement. Even when severance packages are negotiated prior to accepting the position, executive separation agreements are often re-negotiated at the time the executive leaves the company. 

Are Separation Agreements Legal and Enforceable? 

Just because an employer and employee entered into a severance agreement does not make it enforceable. A common way to challenge a separation agreement after it has been signed is to challenge the legality or enforceability of the contract. Certain terms and provisions may be illegal as against public policy in Massachusetts. When unenforceable terms are part of the severance agreement, a court may be able to strike certain provisions or void the entire agreement. 

Disputes After Severance Agreements are Signed

After an employer and former employee have negotiated severance and terms of separation, it does not necessarily mean the relationship is over. An employee may come back to try and get out of the severance agreement, ask for more money, or threaten to file a lawsuit in violation of the agreement. Alternatively, if an employee does not abide by the terms of the agreement, the employer may need to file a claim to enforce the agreement or get back the severance compensation. 

The employer may also refuse to pay the full amount of the severance package. In these cases, the former employee can file a lawsuit, demanding that the severance agreement be enforced and full payment made. Under Massachusetts General Law Chapter 149, Section 150, the employer can be liable for treble damages - three times what they owe.

Talk to an experienced Massachusetts business attorney if you are facing a lawsuit involving severance and separation agreements. Your attorney can help negotiate a settlement, enforce the terms of the agreement, or get financial damages for your losses. 

Massachusetts Severance and Separation Lawyer 

The Katz Law Group, P.C. has nearly 40 years of experience in business litigation and employment law in Massachusetts and across New England. We have represented our clients in severance and separation agreement negotiation and litigation. If you are facing a severance agreement dispute in Worcester, Framingham, Marlborough, or elsewhere in Massachusetts, contact us online today or call our law office at (508) 480-8202.

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