Ripping off the Band-Aid: Considerations for Negotiating Employee Severance

April 3, 2019 | By Andrew J. Horowitz

Consider the following scenario: you are a company decision-maker and are preparing to terminate a long-time employee.  You want to get the employee out the door with as little embarrassing and distracting “drama” and headache as possible. Do you offer a severance payment in exchange for a written release of claims?

It’s not always an easy question to answer, but here are some key considerations in making this important decision:

1.  Do you have a severance policy?

Some corporations have severance policies that offer some amount of severance per year of employment if the employee is terminated for reasons other than performance. Others have an informal practice that is understood to be a “rule of thumb.”  If your company has a policy or practice like this, it is best to follow it as consistently as possible, as failure to do so can be used as evidence in a discrimination claim.  If your company doesn’t have a policy or practice, it is more of a matter for discretion.  Even if you do have a policy, however, your employee may demand additional severance, and you may decide that paying extra severance is a prudent decision given the exposure involved from the particular employee.

2.  Does offering severance reduce lawsuits and other claims?

Often, yes. Losing a job is stressful and emotional. An alarming percentage of Americans live paycheck to paycheck, which means that they have a small window of time between when they get fired and when they can no longer afford to meet their basic needs. While unemployment compensation may soften the blow, it is frequently insufficient to support an individual’s established standard of living, particularly for higher earners.

This stress, combined with the grief, humiliation, and identity crisis that can come with the loss of a job, can motivate an employee to “seek justice” from the company. A severance sufficient for the employee to get back on his or her feet, by contrast, reduces the financial anxiety associated with termination, creates a feeling that the company treated them fairly, and permits the employee the space to work through their emotions with much less anxiety. Employees who receive generous severance payments are therefore much less likely to sue the company.

3.  Can I use severance to protect my business from competitive threats by the former employee?

Yes. If drafted properly, non-compete and non-solicitation agreements entered into at the end of the employment relationship can be easier to enforce than agreements entered into before or during the relationship. Reaffirming an existing non-compete agreement in exchange for severance is therefore prudent. Severance can also incentivize the employee to agree to new non-compete terms.

4.  How important is certainty?

If you do not get the fired employee to accept severance, the time window for the employee to bring suit remains open for a surprisingly long time. While most discrimination claims expire if not brought within 300 days of the termination, the time period for employees to bring certain claims (such as race discrimination and harassment claims under 42 U.S.C. § 1981, wage & hour claims, and common law tort claims such as defamation) lasts for a period of years.

Besides keeping you up at night, the fact that these potential claims remain open can limit your decisions as an employer.  For example, what happens if you terminate a 56-year-old—for reasons unrelated to age—however, after advertising for the vacant position, you determine that the best candidate is only 32? If the new hire is made within 300 days of the termination and the fired employee finds out about it, they may be motivated to file an age discrimination claim. Do you hire the younger candidate and take the risk, or do you hire a less-desirable candidate who is closer in age to the fired employee?

5.  Will offering severance make me look like a “mark”?

Perhaps. If your employee doesn’t ultimately accept the severance, then they aren’t bound by any confidentiality agreement regarding your offer and are free to tell other employees about it. This, in turn, can cause other employees to expect severance. However, depending on the litigation risk involved, many companies find this cost worth the benefit.

6.  Do I get complete peace of mind when my employee accepts severance?

For the most part, yes—if the severance is done correctly.  Keep in mind that there are numerous formal requirements that must be satisfied in the language of the agreement in order for it to be fully binding, particularly if the employee is age 40 or older.  There are also certain claims that cannot be released by agreement, such as claims for unpaid wages.  Some states, such as New Jersey and California, impose specific requirements for employment agreements, including severance agreements.  There are, however, strategies that employment counsel can employ to ensure that all requirements are satisfied and the risks associated with un-releasable claims are mitigated to the extent possible.  One thing is certain – paying out severance at the time of termination, without requiring the employee to sign a well-drafted severance agreement that has been reviewed by counsel, is a risky proposition for employers.

About the Authors

Andrew Horowitz

Andrew J. Horowitz

Associate

Andrew is a strategic and pragmatic attorney who focuses his practice on complex commercial litigation and employment law matters. Andrew serves as a trusted advisor to his clients. He enjoys taking a...

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