A prospective client asked me about separation and severance agreements. More specifically, the company asked about terminating a long time employee (who’s also over 40 years old), and if they should offer this individual a severance and/or have them sign a separation agreement.
Generally speaking, whenever I’m asked about employment agreements (e.g., severance, separation, hiring, noncompete and nonsolicitation), I ask the company why they think they need such an agreement.
It’s not an absolute necessity to offer an exiting employee a severance or separation agreement unless the employer needs protection from that employee, the employer desires to offer the employee a going away gift, it’s pursuant to company policy or practice, or the company is satisfying the terms of a contract or agreement.
More specifically, some of the reasons why a company might need a severance or separation agreement are as follows:
- In part, when an employer considers using a separation agreement, they’re talking about purchasing an employee’s agreement not to sue or file a complaint against them. So as an economic consideration, the company should use an agreement if they believe that the employee will sue or file a regulatory agency complaint.
- Another reason for a separation agreement might be if it’s a matter of company policy/practice.
- If the employee’s suing or filing an agency complaint isn’t a concern, then the employer might consider just giving the employee a severance with a nice letter of thanks and recognition for years of service; i.e., it’s a gift.
- Relative to a 40 year old or older employee, all employer’s need to be aware that a separation agreement with a release of claims under the Age Discrimination in Employment Act (ADEA) requires more complex contractual language than is otherwise required for a general release of all claims. This additional language is pursuant to the Older Workers Benefit Protection Act.
- Another factor is that whatever the company does, relative to this employee, might set a precedent for the remaining employees (at least in the minds of those employees). This isn’t necessarily a legal precedent, but more of a feeling or belief of entitlement. Severance is only legally owed in certain situations (e.g., contract, policy, agreement).
- I suppose that the key consideration is whether the company is reasonably sure that they’re getting something from the transaction that they wouldn’t get in the normal course of business.
Whether or not a company needs such an agreement also addresses the issue of whether they need a labor and employment attorney to draft the agreement (also how much the attorney’s services will cost them). From a human resources or human capital perspective, the company is also answering the question of how much it’s worth in dollars to insure that the exiting employee leaves on good terms.
Essentially like all business transactions, the decision to offer an exiting employee a severance or separation agreement entails a cost-benefit analysis.
Your comment about “precedent” is right on point for a number of reasons. First, even if your separation agreement includes a confidentiality clause, the information always seems to find its way to the employee grapevine and creates an expectation for future departing employees. Second, sometimes the terminated employee is surprised by being offered severance in return for signing a release. Some of these employees get the impression that the employer has something to hid and that’s why the agreeement is being offered. Overall, employers should spend more time thinking about the communication with the departing employee to manage the “perceptions”.