10 Common Questions about Severance Agreements

Jul 17 2017

If you just received a severance agreement from your employer (or think you soon might), this Employee Rights Blog post is for you.

1. Why is the agreement so long?

Severance agreements (or separation agreements) are legally-binding contracts.  They are typically drafted by the employer’s lawyer for the benefit of the employer, not the employee.  The employer’s lawyer doesn’t want to leave anything ambiguous; she wants to consider every possible question you (or a court) might have and put the answers right in the contract, to prevent you from arguing later that you didn’t understand something.

Although your severance agreement may seem long, many of its terms are probably entirely standard, and your employer probably uses the same agreement — or a very similar one — for every employee it terminates.  By the same token, however, severance agreements often contain provisions that are detrimental to you as an employee and could even impede your ability to find work in the future or to obtain all of the benefits to which you are entitled.  The best course if you receive a severance agreement is to speak with an experienced employment lawyer, who can either guide you behind the scenes or directly negotiate with your employer to improve the severance package or modify or remove harmful provisions.

2. What about health insurance?

If you received health insurance from your employer, then you have a right under federal law to continue your employer-provided health insurance, albeit at your expense.  The Consolidated Omnibus Budget Reconciliation Act of 1985 (frequently called COBRA) provides that, if an employer wants to deduct its health insurance costs, it must allow its employees and their immediate family members who have been covered under its health care plan to keep their coverage after employment ends.  However, the employee must pay the full cost of the insurance at the same rate the employer pays to its insurance carrier, plus a two percent administrative fee.  In most cases, COBRA eligibility lasts for 18 months following termination of employment.  You have a right to COBRA whether or not the agreement says so.

Some agreements provide for a period of time during which the employer will pay the cost of your COBRA benefits, meaning that it will continue to provide health insurance as if you were still employed by paying its portion of your insurance.  This is frequently a subject of negotiations.

3. What about the money I am already owed?

The agreement probably includes a clause saying that you agree that you have been paid all wages, commissions, or other compensation that you were owed at the time of your termination. If that isn’t true — because, for example, you are still owed commissions from sales you already made — then you should not agree that it is.  The best practice is to state explicitly in the agreement exactly how much money you are owed, the terms of payment (when and how it will be paid), and what happens if the terms of payment are not satisfied.

4. Are the severance benefits taxable?

Our firm does not provide tax advice, so you should consult with a tax lawyer or accountant about the tax implications of your specific severance agreement.

As Benjamin Franklin famously said, though, “in this world nothing can be said to be certain, except death and taxes,” and severance agreements are generally no exception.  Most severance benefits are taxed as wages, meaning withholding will be taken out of the severance amount in the same way as the money you received in your regular paycheck during your employment.  However, there are exceptions to this general rule, including with respect to stock options and claims for non-economic (or emotional distress) damages.

You may have heard of friends who received settlements of legal claims — such as from a car accident — that were not taxed.  That is because federal tax law treats settlement income differently depending on the nature of the underlying legal claims.  Payments from cases involving physical injuries generally are not taxable, whereas payments from cases involving wrongful terminations generally are.  You may experience physical or emotional pain (such as an ulcer) as a direct result of your termination.  That pain alone, though, likely does not render your payment exempt from taxation.

5. The agreement says I can’t work there again. Is that legal?

It is very common for employers to request this provision — often called a “no rehire” or “never darken my door” clause — and there can be a good reason for the request.  Your employer is giving you a severance agreement because it wants finality.  In other words, it’s paying you money so it doesn’t have to worry about you again.  Still, the employer is nervous that you might apply to be rehired, have your application denied, and then sue for retaliation, and it (naturally) wants to avoid that.  One way to avoid a future lawsuit would be for you to release all legal claims you might have against the employer in the future.  However, you actually cannot do that, because agreements to waive future claims are unenforceable as a matter of public policy.  So the employer takes a different route.  It has you agree that you won’t apply again and that any application you do submit can be denied because of “irreconcilable differences.”

As to legality, that depends on who you ask.  The U.S. Equal Employment Opportunity Commission disfavors these clauses and often refuses to permit them in settlement agreements that it reviews.  Courts, however, seem to have a different view, with numerous federal courts around the country enforcing these provisions.  (The notable exception is in California, where the courts have concluded that these provisions violate state law.)

Whether to agree to a “no rehire” clause depends on the exact language of the clause, as well as your specific professional circumstances.  Some “no rehire” clauses can function essentially as restrictive covenants, effectively preventing you from earning a living in your chosen field.  Other clauses might be narrow enough to be acceptable to you.

6. What about the other promises that were made to me?

Be very careful here.  The agreement almost certainly contains a provision that states, in substance, that you are not relying on any other representations that have been made to you outside this written agreement and that you understand that the entire agreement is expressed in writing in this document.  (It also may say that it supersedes any other written agreements.)  This provision has several names, including “merger clause,” “integration clause,” and “total agreement clause.”  Regardless of the name, the result is that any other promise or representation that your employer made to you — but which is not included in the written agreement — becomes effectively null and void.

Be aware that the agreement may make specific reference to prior agreements (such as a non-competition agreement or an invention/patent ownership agreement) that you signed before or during your employment.  These agreements may specifically “survive” the termination of your employment, meaning they remain in effect even after your employment ends.

7. Can the employer limit my time to sign?

For the most part, yes.  Separation agreements are contracts like any other, so the terms of the offer will control.  If the party making the offer (here, the employer) says, for example, that the offer expires after seven days, then the offer will expire after seven days.  Of course, if the employer wants to hold the offer open longer than it initially says, then it can.  From your perspective, you may want to ask your employer for more time to consider the offer, especially if you are waiting to speak with an employment lawyer.

There is a caveat, though.  A federal law called the Older Workers Benefit Protection Act (or OWBPA) requires employers to follow certain rules in order to obtain a valid release of legal claims under the federal Age Discrimination in Employment Act (or ADEA), which applies to workers who are 40 or older.  The rules are extensive, but among the most important is that, in order for the release to be effective, the employee must have been given at least 21 days — or 45 days, under some circumstances — to consider it.  The employee must also be given seven days after she signs the document in which to revoke or rescind her acceptance, usually by writing directly to the employer.

8. What if the employer doesn’t pay?

This is a good question to ask if you were working for a small business or one that you know is in financial trouble or if you are scheduled to receive severance payments over time (often called “structured” payments).  There are some constructive steps you can take ahead of time to protect yourself against the risk of non-payment, such as including enforcement terms in the separation agreement.  The employer, for example, could be required to pay you interest if it does not make its payments on time.  Or you may be able to obtain a personal guarantee from the employer — that is, to have the owner of the business sign the agreement in her personal capacity.  That way, if the employer defaults on the severance payment or goes bankrupt, you can seek payment from the individual.

9. The employer tells me I “need to sign.” Is that right?

No.  Whether to sign is your decision.  No one can make you sign a contract.  (In fact, if you sign a contract because someone “made” you, then the agreement might be a product of what lawyers call “duress” and therefore unenforceable.)  However, you should be aware that, if you do not sign the agreement, you likely will not receive some or all of the benefits described in the agreement.

10. Should I sign?

That decision is yours to make, based on a variety of factors too numerous and complex to list here.  Every situation is different.  However, you absolutely should not sign the agreement without first understanding all of its terms.  Severance agreements are detailed and complicated, and lawyers who do not regularly review and negotiate them may be unfamiliar with all of the moving pieces.  That is why it is often helpful to speak with an experienced employment lawyer to get a full understanding of the proposed deal.

If you think you might have a legal claim related to your termination (or any other aspect of your employment) — such as a claim of discrimination or retaliation or for unpaid wages — then you should seek legal assistance before deciding whether or not to sign the proposed severance agreement.  It may be possible to negotiate a better separation package, or it might make sense to take your case to court.  An experienced employment lawyer can help you consider your options and decide how to move forward.

Learn More About Severance Agreements

Still unsure of how to proceed? To help you figure out what to make of the contract in front of you, here are the answers to 10 (More) Common Questions about Severance Agreements.

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About the Author

Joshua R. Goodbaum

Joshua R. Goodbaum

A graduate of Harvard and Yale, Joshua Goodbaum represents individuals in litigation and negotiation, with particular emphases in employment, civil rights, and appeals. He has represented clients in every level of our justice system, from local trial courts to the Supreme Court of the United States, in matters ranging from constitutional law to contract disputes. Learn More

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