Article written by Daniel K. Wooten

The ongoing recession has forced many employers, some for the first time, to make the difficult decision to cut parts of their work force. In order to give their employees some income protection after they lose their jobs and to protect themselves against wrongful termination claims, many employers have chosen to use severance agreements.

No employer should prepare a severance agreement without help from an employment lawyer. The following, however, are some of the things that an employer should consider when using a severance agreement:

1. The Federal Age Discrimination In Employment Act, which covers discrimination because of age in employment or employment benefits, affects severance agreements the most. It covers most employers in industries affecting interstate commerce if they have at least 20 employees for each day in each of the 20 or more calendar weeks in the current or preceding calendar year.

To waive age discrimination claims effectively in a written employer-employee severance agreement, generally the waiver must:

(a) be written in language that is clear, devoid of jargon or legalese, and calculated to be understood by the employee;
(b) specifically refer to the rights and claims arising under the Age Discrimination In Employment Act;
(c) not waive rights or claims that may occur after the date of the waiver;

(d) give the employee something more than he or she would otherwise have a right to receive;

(e) advise the employee to consult a lawyer before signing the agreement;

(f) give the employee at least 21 days to consider the matter; and

(g) give the employee 7 days to revoke the agreement.

There may be additional requirements if the employer terminates the employee's job as part of a program.

2. Certain claims simply cannot be released in a severance agreement. For example, Missouri law prohibits release of claims for unemployment benefits, and an employee cannot release a workers' compensation claim without court approval. Under federal law, the Department of Labor must supervise the release or waiver of claims under the Federal Fair Labor Standards Act.

3. Because some state and federal laws prohibit release of prospective claims, most employers should not attempt to obtain release of claims that postdate the severance agreement. Consequently, it is a good practice to have an employee sign the severance agreement upon leaving employment. That forecloses a claim that the employer engaged in wrongful conduct between the time the parties signed the severance agreement and the time the employee actually left employment.

4. Most severance agreements also contain a detailed description of the severance compensation or benefits that the employee will receive. Often payments will occur over time and will resemble the employee's typical payroll checks, with tax withholdings.

Employers who prefer to make lump-sum payments should know that employees sometimes find such payments unpalatable. Tax withholdings for lump-sum payments may exceed what is necessary for the employee based upon the employee's yearly compensation. For example, if the employee earns $40,000 a year and is paid bi-weekly, the employer's computerized payroll program may calculate the employee's annual income at more than $200,000 when it sees a one-time $10,000 lump sum payment-causing it to make greater tax withholdings. Employers thus should discuss such a scenario with employees before they sign the severance agreement.

5. It is important that a severance agreement state clearly when the employee's employment ends. Certain dates, such as the date of a qualifying event for triggering benefits under COBRA or a similar state law, flow from the severance date.

6. The severance agreement should also state clearly that, upon signing the severance agreement, the employee has received all compensation and benefits due him or her other than, of course, the payments that the employee will receive under the agreement itself. That eliminates any later claim that the employee did not receive all the compensation due before the termination.

7. Often employees receive confidential information or documents during their employment. The agreement should clearly require the employee to return to the employer all documents or property that the employee has received during employment. The agreement may also need a confidentiality clause to protect the employer adequately. Some employers also choose to include non-competition or non-solicitation clauses in the agreement in order to protect them against unfair competition by the employee.

8. Some employers also choose to include a confidentiality provision prohibiting the employee from discussing the contents of the severance agreement with co-workers or others. This would be particularly important if some employees receive greater severance benefits than do others.

9. To help employees get other jobs, some employers also specifically say in the agreement what future references they will give terminated employees. This can be done several ways, such as by attaching a reference letter to the agreement. It may be wise to designate specifically who in the employer's organization will respond to reference inquiries from the terminated employees' prospective employers.

This summarizes only a few of the things that an employer should consider when severing the employment relationship. As noted above, an employer should always consult an employment law attorney before presenting the employee with the severance agreement.