Navigating Severance Agreement Reviews: The Ultimate Guide

Severance Agreements Decoded

Severance agreements are contracts between a company and its employees. In the most basic form, they consist of a payment made to an employee upon termination of employment. The employee then agrees to give up his or her right to pursue claims against the company in return. The payment is known as severance pay (or severance benefits), and the trade-off is called a release. These agreements can also provide for other benefits like assistance in finding a new job, outplacement services, healthcare coverage, et cetera.
As a general matter, severance agreements are voluntary – meaning the employee is not required to participate in any program. But many employers offer severance agreements. Severance agreements can be offered at any time during a person’s employment , but are most commonly offered: to close out a terminated relationship; to provide a financial incentive for an employee to voluntarily terminate employment; to mitigate litigation; or as part of a negotiated settlement of a dispute.
There are common elements often included in severance agreements:
The Legal Stuff
Even with common elements, severance agreements have a great amount of variation. Each is drafted to the specific circumstances and to the particular company offering it. It is not uncommon for there to be inclusions and exclusions (for example, the waiver and release may not apply to claims that may not be waived under applicable law or would be against public policy to waive).

The Importance of a Severance Agreement Review

The importance of reviewing severance agreements cannot be overstated. Employees who believe that they have lost their job on a voluntary basis or through Downsizing put too much faith in the employer’s statement that the severance payout is fair and that the agreement protects the employee. While it is the employer’s obligation to suggest that all departing employees consult with an attorney to review the severance agreement, employers are notoriously uninterested in protecting employees’ rights. Employers are looking for any way to minimize the payout and get a release from the employee that completely disallows any possibility of future claims of any kind. Employers, and their lawyers, always look out for their employer’s financial interests. Employees have limited resources, tight deadlines and often trust that the agreement they are being offered is the best one possible. Too often this is not the case.
The most common and, in our experience, the biggest risk that employees run with a severance agreement is a failure to fully understand the entire deal being offered by the employer. Severance ‘pay’ is only part of the deal. Employees have other benefits that need to be addressed in the Severance Agreement including: COBRA; Health Insurance; Retirement Payouts; Bonuses; Stock options; and Waiving HIPAA Privacy Rights. If the departing employee does not understand the corporation or company’s plans and benefits, there is a danger that the company will lose or gain money when signing the agreement. For example, if the Severance agreement states that the Employee shall receive a payment for accrued vacation time, the company is not required to pay for the accrued Vacation Time unless it is specifically stated in the Severance Agreement.

What to Look Out for when Reviewing a Severance Agreement

When reviewing a severance agreement, it is critical to pay close attention to the following components:
Payout/Consideration: Any severance payout should include compensation for the transition period and be commensurate with the employee’s salary and bonuses.
Health and Other Benefits: Health care coverage under COBRA provisions will no longer qualify as "benefits" but contributions to an HSA plan or other type of retirement savings plan may qualify as consideration.
Non-Compete and Non-Solicitation: Any non-compete provision should not exceed the employee’s termination date. If the employee is terminated without cause on June 30, the non-compete should expire on the following December 31. The non-solicit could extend six months or more based on the prior term of his or her employment. Non-competes are not universally enforceable so check state law for the governing standard.
Other Post-Employment Obligations: Evaluation of nondisclosure agreement terms must be done carefully to avoid red flags and litigation over former employees. Noncompete/enforceability and consulting opportunities also require examination.

Beware of these Pitfalls (and Warning Signs) in Your Severance Agreement

The review of a severance agreement generally involves examining a number of factors which may lead to expensive pitfalls. Pay particular attention to the following pitfalls and seek short term legal advice when necessary.
Ambiguous language
One of the red flags to be particularly vigilant about when reviewing a severance agreement is ambiguity and unclear language in the contract or agreement. For example, if your agreement states that your employment was terminated for "just cause", but does not provide any particulars or examples, this language may be too ambiguous to support the termination. The employer will have the burden of proving the "just cause" for the termination, which it may or may not be able to do. Under the Ministry of Labour Act, employers have a 10-day window to: (a) provide severance pay or (b) produce a copy of the policy in your workplace (i.e., the termination policy) so you can respond to the accusation. If there is no such policy in your workplace, you may not be required to repay anything. That being said, I recommend seeking the advice of legal counsel as to whether you will be required to repay or reduce the amount of severance pay you received.
Discharge of severance pay obligation via release
Sometimes, such as in the case of Group I called the Labourers International Union of North America, the employer attempts to discharge its obligations under a collective bargaining agreement by asking employees to sign a release in connection with funds they receive when their employment ends . This may be considered undue bargaining power and may set a precedent for other unwanted actions from the employer. In this situation, the employer effectively asked the unionized employees to sign a release discharging the employer’s severance obligations. This practice has no basis in precedent and is likely in direct conflict with the collective bargaining agreement.
Gag Clause
A gag clause, or confidentiality clause, is one more way to ensure that employers can keep a tight lid on the portrayal in the media of the severance package you’ve signed. When deciding whether to sign a confidentially clause, always remember that confidentiality clauses are unenforceable if the employer committed illegal conduct. It is reasonable to expect an employee to keep confidential the company’s business information and not disclose any proprietary information, however the confidentiality clause should not be unreasonably broad and unreasonable in scope. A confidentiality clause should not deal with a blanket prohibition from discussing your employment. The use of "both sides of the mouth" language often creates a loophole in the language that leaves an employee unable to bring findings of misconduct to the appropriate authorities. When given a wide scoped release or a confidentiality clause and there is a possibility of illegal conduct, talk to an employment lawyer who can guide you. Often in Canada, there is a tension between the principles of full and frank discussion and settlement negotiations.

The Significance of Using Legal Counsel for a Review of a Severance Agreement

Engaging a legal professional to review your severance agreement enables you to receive an assessment that is based on your specific facts and circumstances. Such an attorney can offer helpful insights or alternative options based on their familiarity with your area of expertise and your particular employer. Sometimes, this experience helps them negotiate better terms than you could have achieved on your own.
Also, having legal representation is especially helpful when it comes to assessing whether your severance agreement complies with the relevant laws and regulations. Most employers are adept at inserting carefully worded provisions that your average layperson may not easily understand, but a lawyer can make sure you are not waiving your rights under any applicable laws (such as in wrongful termination or disability discrimination cases) or are not giving up important legal remedies without the necessary consideration in return.

Next Steps Following a Review of a Severance Agreement

Once the review of the severance agreement is finished, the employee has a choice. They can either accept the agreement as is or look to negotiate some of the terms or conditions contained within it. It is very common for employees to ask for one or more changes to the proposed agreement. The most common request is to extend the amount of severance time being offered. Employers in many instances will extend the amount of severance time, especially if that employee has been with the company for a long period of time.
Negotiation regarding the amount of severance time can be tricky for many employees. It can be very difficult for an employee to negotiate a severance agreement situation because the employee likely is in a very vulnerable position at the time. The employee may be facing the decision of trying to secure another job in order to take care of him or herself, or negotiating a severance agreement. In many informal discussions with existing clients, employees have advised me that they are unwilling or unable to stick up for themselves as they are afraid that the employer will put pressure on them or even retaliate against them if they push back or negotiate too hard. For this reason, it is always advisable to have an outside lawyer look at the severance agreement, to assist in the negotiation process, and to provide the employee with an outside source of intelligent legal advice .
In cases where an employee cannot or will not negotiate certain aspects of the existing severance agreement, then that employee must make a choice on whether they are going to accept the offer or ultimately reject it. There can be many factors that should go in to that decision. The variables that one must consider include: How much do you need the money that they are offering to you? How quickly do you need the money? Is the company going to continue to pay for your health insurance or would you have to go out and buy insurance and pay for it yourself? How long can you wait to receive these funds? Would it be better for you to sign off and pursue your other legal claims in a lawsuit and see what you can get through litigation? Could you get a better deal if you file and litigate a lawsuit? For these reasons, it is very important for an employee to confer with an attorney about the decision regarding accepting or not accepting a severance package offer.
If you receive a severance package from your employer and are thinking about accepting or rejecting it or bargaining with your employer over some of the terms of the severance package you also are probably surprised at the fact that by law the employer must allow you to review the severance agreement for 21 days before you sign it. In addition, in many instances the employer will give you 7 days after you sign it to think about your decision again to formally accept the severance package arrangement or not.