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Preparing a Severance/Separation Agreement

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Preparing a Severance/Separation Agreement Resource Guide Preparing a Severance/Separation Agreement The following are guidelines to consider when preparing a severance/separation agreement. Each agreement should be narrowly tailored to reflect the individual circumstances of the employment separation. Relying on “form” agreements increases the likelihood that an agreement could be found to be unenforceable if challenged in court. It is recommended that all severance/separation agreements be drafted by or with your employment attorney; however, below are issues to be aware of when preparing a severance/separation agreement with your attorney. When Should I Offer Severance? • Does the company have a formal severance pay policy/plan? • Do you routinely offer severance pay or only in certain circumstances or to employees at a certain level? • Do you have a concern that the employee may file a discrimination or other type of employment claim? Does it Matter When the Employee Signs the Agreement? • The severance agreement should be signed only after the employee’s separation date. • If the agreement is signed prior to the employee’s last day of work, the employee has not waived claims that may occur after signing but before the employee’s actual termination date. What is “Consideration?” • The agreement must offer benefits to the employee in exchange for his/her release of claims against the company – these benefits are the employee’s “consideration” for signing the agreement. • The agreement must offer benefits (consideration) to which the employee is not already entitled upon termination. • For example, if the company’s current policy is to pay out earned, unused vacation upon termination, this vacation pay is already owed to the employee and, therefore, cannot be offered as “consideration” to sign the agreement. • Be sure to review other agreements the employee has signed with the employer which may provide benefits upon separation. • For instance, if the employee signed a confidentiality or other agreement that promised severance upon termination, any severance pay offered in the separation agreement must be above and beyond the severance provided by the confidentiality agreement. How Much Severance Pay Should Be Offered? • Is the severance package consistent with previous offers or is it higher or lower than past severance offerings? • If the severance amount is different than previous offers, why? • Will you pay a fixed severance based on a formula (typically a set number of weeks for every year the employee worked for the employer)? • Or will some portion of the severance pay be based on when the employee finds new employment? For example, some agreements state that severance will end either when the employee finds new employment or at the end of the severance period, whichever comes first. This avoids the employee receiving “double pay” if he/she finds new employment during the severance period. Information contained in this document should not be regarded as a substitute for legal counsel in specific areas. This document is copyrighted by MRA – The Management Association, Inc. The document may be reprinted for internal use, but may not be republished without the prior permission of MRA. For further assistance call or visit www.mranet.org, © MRA – The Management Association, Inc. Wisconsin: 800.488.4845 Minnesota 888.242.1359 Northern Illinois: 800.679.7001 Iowa & Western Illinois: 888.516.6357 Preparing a Severance_Separation Agreement Page 1 of 3 Resource Guide Continued Should We Offer Outplacement Services? • Will you offer outplacement services and/or educational programs to the employee? • This added consideration may make the severance package more attractive to the employee. • In addition, if an effective job search assists the employee in securing new employment, the employee may be less likely to breach the severance agreement by disparaging the employer or violating the confidentiality clause. What About Medical Continuation Coverage/COBRA? • Do not offer medical continuation coverage/COBRA as consideration. COBRA is available to employees by law and, therefore, COBRA continuation coverage cannot be consideration. • It is not recommended to keep the employee on the company’s group health plan as an “employee” following separation. Such non-COBRA coverage may not be available under the company’s plan. • The employer may offer to pay the COBRA premium for some period of time as consideration. What Is a Release of Claims and Why Is It Important? • The release is the most important provision in a severance/separation agreement, yet some employers draft the release in an unenforceable way or forget to include it altogether. • The employer receives a release of claims in exchange for the severance paid to the employee. • Be sure to include all claims, known and unknown. • Note that the employer cannot request a release of future claims (which is why the employee should not sign the agreement until after termination). • The employee cannot release claims under the Fair Labor Standards Act (“FLSA”) without the approval of the Department of Labor. • Note: Under the final rule of the Family and Medical Leave Act (“FMLA”), effective January 16, 2009, employees may now retroactively waive their FMLA rights (Prior to the final rule, employees could not release FMLA claims). A severance/separation agreement may include FMLA claims up to the date the release is signed. • Depending on state law, an individual may not be able to release worker's compensation claims. For instance, under Wisconsin law, a claim for workers’ compensation benefits cannot be compromised without the approval of the Wisconsin Department of Workforce Development. Can the Agreement Address Unemployment Benefits? • An employer cannot promise receipt of unemployment benefits nor guarantee the denial of benefits. • The effect of the payment of severance benefits on an individual's eligibility for unemployment benefits depends on the state. In Illinois, severance pay does not render the individual ineligible to receive unemployment benefits, regardless of whether the severance payments are made periodically or in a lump sum. Under Iowa law, severance pay is deducted dollar for dollar from unemployment insurance benefits. In order for severance payments to offset unemployment benefits in Wisconsin, the severance payments must be allocated on a weekly basis. The employer can lawfully pay severance in a lump sum or a bi-weekly payroll in Wisconsin; however, in those instances, the employee may qualify for some unemployment benefits. Should We Agree to Provide References? • Do not promise non-derogation by everyone in the company. • Limit those bound on the employer’s behalf to specified senior managers of the company. • Will you provide a reference letter beyond the basics? • Wisconsin law offers protection to employers who provide references in “good faith.” However, the fear of a defamation claim still remains (if the employee can show that the employer knowingly provided false information or made the reference maliciously). Preparing a Severance_Separation Agreement Page 2 of 3 Resource Guide Continued Should We Prohibit the Employee From Ever Reapplying for Employment at the Company? • The agreement can prohibit the employee from reapplying for employment with the employer; however, consider limiting the scope of the prohibition to specific employer locations and/or including a time limitation. • A lifetime prohibition on employment with every affiliate of the employer may be too broad. Can the Employee Be Forced to Keep the Agreement a Secret? • Avoid requiring absolute confidentiality as to the existence and terms of the agreement. • Include language permitting the employee to testify in a court proceeding if subpoenaed. Can We Prohibit the Employee From Working for a Competitor? • If you choose to present a non-compete provision in the severance agreement and the employee has not signed a prior non-compete, be aware that the employee may reject the severance agreement if the financial incentive is not enough to justify the significant restriction. • For example, an employee who is not subject to a non-compete absent the severance agreement likely will not sign a severance agreement containing a non-compete in exchange for only a few weeks of severance pay. What Do We Need to Know About the Older Workers Benefit Protection Act? The Older Workers Benefit Protection Act (“OWBPA”) sets forth minimum standards for enforceable waivers of age claims under the Age Discrimination in Employment Act (“ADEA”), including that: 1. The agreement must be written in language that is understood by the employee (or by the average individual eligible to participate); 2. It must specifically refer to rights or claims arising under the ADEA; 3. It cannot waive rights or claims that may arise after the date on which the waiver is executed; 4. It must be in exchange for consideration in addition to anything to which the individual is already entitled; 5. It must advise the employee(s) in writing to consult with an attorney prior to executing the agreement; 6. The employee must be given sufficient time to consider the waiver. Generally this is 21 days; however, if the waiver is in connection with a group exit incentive, employees must be provided at least 45 days to consider the agreement; 7. The agreement must provide a revocation period of at least 7 days; and 8. If the waiver is part of a group exit incentive program, the employer must provide demographic data of the employees covered by the program (to include eligibility factors and time limits for the program, including job titles and ages of those eligible and ineligible for the program). What If The Employee Makes a Counter-Offer and Requests More Severance? • Consult with an attorney, particularly if the employee’s counter-offer comes from an attorney. • Assess whether the individual may decline to sign the agreement and possibly file a claim against the company if the employer refuses to negotiate the severance package. Balance the cost of defending a claim (whether valid or not) against the cost of increasing the severance package.
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