Understanding Severance Agreements
Severance agreements are contracts offered to an employee upon separation from employment. An employee may agree to certain terms in exchange for compensation, benefits or other considerations from an employer. In the absence of a severance agreement, an employer is generally free to terminate an employee without cause or cause and an employee has no obligation to continue under the employment relationship. Signing a severance agreement can be both beneficial to an employee post-termination and desirable to the employer, as by signing the agreement the employee may release any claims they have against the employer.
Under both state and federal law, an employer may lawfully terminate an employee on most grounds, including reduction in force based upon business needs, the economy or other general reasons if the termination does not violate the terms of a contract or applicable law . While the reasons behind the termination may be lawful, there are certain restrictions under both federal and state laws that employers must consider when terminating employees over the age of 40. Under the Age Discrimination in Employment Act of 1967, as amended, as well as individual state laws, employees age 40 and over may not be discriminated against because of their age, i.e., an employer may not use an employee’s age as a factor to terminate the employment relationship. In conjunction with this requirement, the Older Workers Benefit Protection Act (OWBPA) requires that severance agreements offered to employees as part of a termination, including reductions in force be careful in their wording as well as in the terms offered to the affected employees.
Why Workers Over 40 Must Follow The 45 Day Rule
The OWBPA created the 45-day consideration period for severance agreements because it specifically intended to protect workers aged 40 and over. The OWBPA is short for the Older Workers Benefit Protection Act which amended the Age Discrimination in Employment Act to require a 45-day notice period and other safeguards for certain severance agreements that release employers from employment related claims of employees over 40 years old.
An employer cannot require an eligible employee to execute a knowing and voluntary waiver of any right or claim arising under ADEA until the employee has been given a period of at least 45 days within which to consider the decision to execute such a waiver. In short, you cannot be forced to sign a waiver of age discrimination claims until "you" have considered signing it for 45 days.
Essential Provisions of A Severance Agreement
Key Elements of a Valid Severance Agreement under the Age Discrimination in Employment Act of 1967 (for Employees over 40)
Clearly, not all severance agreements are valid agreements. The question is what terms must be present in order for the agreement to be valid. The first term any severance agreement must contain to be valid is consideration. Consideration requires that the employer provide something that is not already owed to the employee. For this reason, without any additional language, severance benefits tied directly to salary (i.e. "2 weeks for every year worked") do not constitute adequate consideration under the law. Restrictive covenants (i.e. non-compete agreements) may or may not be adequate consideration, depending on the nature of the restrictions in place. Acknowledging this, an increasing number of companies are beginning to offer supplemental benefits if a departing employee enters into a severance agreement and a required restrictive covenant. Examples of such packages include legal fees, outplacement assistance and future income guarantees.
The second element in the creation of a valid severance agreement is the waiver of rights. This is where the law comes into play. Generally speaking, a departing employee cannot give up the right to file a lawsuit until he or she has filed a lawsuit. However, there are exceptions, (for example, workers compensation claims), and statutory carve-outs, but otherwise, the departure from employment must occur before the waiver can happen.
The third element of a valid severance agreement is the benefit iteration itself. For employees over 40, the law requires that the severance benefits be laid out in a clear manner so that the employee can readily calculate the value of the agreement. Some courts have held that it may be sufficient to include the amount of the employee is entitled to and the calculus behind it in an addendum to the severance agreement, provided the calculation was clear. However, others have held that the calculation should be included in the body of the severance agreement.
Regardless, to be valid, severance benefits must be fully set out before a departing employee waives his right to his employment claims. The company does not have to provide severance benefits or any other preferential treatment to any departing employee, but if it does, it must be careful to comply with the requirements of the law. Alternatively, the employer is free to draft the severance agreement to comply with the necessary elements of a valid severance agreement.
What Is The 7-Day Revocation Period
Consideration is only one part of the equation. Once a worker has executed the agreement, he or she still has the right to withdraw his or her acceptance of the release during the additional seven day revocation period. Most employers are not aware of this additional right that must be afforded to an employee over 40 years old. Employers may not condition the package being rolled out because the general counsel of a public company just made sure that the release was enforceable without talking about whether an additional period of time should be given to the employee to change his or her mind. Regardless , courts continue to find the seven-day revocation period to be an essential part of the consideration for an employee’s release of claims.
Negotiating A Severance Agreement Over 40
If you are over 40 years of age and are being offered a severance agreement, it is important to handle that offer with care. There are very specific requirements that must be complied with in order to make that severance agreement effective. Assuming that you have time to consider the agreement and whether to sign it, here are some tips to help you negotiate a severance agreement:
- Review the documents with a lawyer so that you understand your rights and any pitfalls that await you resulting from your decision not to sign the agreement.
- Focus on the amount of severance to be paid. This should be generous based upon your particular situation. You should also be awarded transfers of assets under any company plan, the ability to continue all insurance benefits until you reach the age of 65, the right to have firm vesting of retirement benefits, some type of a tax-free payment amount such as medical reimbursement through a qualified plan, and the right to extended 401(k) benefits.
- Be sure that you understand your rights to pension benefits, vesting and other IBT items such as early retirement incentives or retirement bonuses.
- Make arrangements to meet your financial obligations under the agreement, particularly those having tax implications. For example, if you are receiving a lump sum payout of your retirement plan, you should consider rolling over the payments from your plan into an eligible IRA account. This will allow you to defer any taxation associated with the plan. See a qualified 401(k) administrator regarding your options for deferring taxes.
- If you have accrued company stock as part of your retirement plan, consider using Internal Revenue Code section 1042 and a qualified replacement plan in exchange for your stock. As a result, you transfer liability for the stock into an individual retirement account. See special Internal Revenue Code sections, IRS guidelines, your accountant and your plan administrator for details.
FAQs
Frequently Asked Questions about Severance Agreements for Employees over Age 40
How will I know if I need to sign a severance agreement?
Usually, when an employer terminates an employee, the employer will either tell the employee that he/she does not need to work any longer and that the employee should go home paying the employee during the notice period, or that the employee must work until the end of the notice period, if the notice period is greater than a week.
Why do employers ask employees over 40 to sign a severance agreement?
Sometimes when the employer terminates an employee the employer will offer severance pay in exchange for a release of claims against the company, if the employee has signed the release the employee has received compensation in excess of his or her salary during the notice period but forfeits the right to sue the employer. The employer gets the peace of mind it wants and the employee gets money today instead of waiting until the litigation ends at a later date.
What types of benefits (other than money) are included in most severance agreements?
A severance agreement usually includes a letter of reference (the employer agrees to speak on your behalf) or out-placement services (usually a couple of sessions with a consultant) meant to help the employee find a new job.
My lawyer said I have to wait 45 days to sign the severance agreement , why?
Because the employer is an American company we can assume that they are covered by the OWBPA. This US statute requires that the employee be given 45 days to consider the offer, if the employee is covered by the OWBPA.
Do you think I should go back to the employer and ask for more money in exchange to signing the severance agreement?
It all depends, on whether the demand you make for more money is reasonable, on the language in the offer letter, on your expectations and on your financial circumstances. If your former employer is a foreign company, for example, if you were employed by a European Company with subsidiaries in Toronto, then the offer to sign the release should not be tied to the "legal" severance amount. However, if that employee were terminated in Toronto the amount of the legal severance pay would be the low end, and an offer to sign the release would be in exchange for money in excess of the amount the employee is entitled to.