Analyzing a Severance Agreement

posted by Mark Santagata January 2, 2015

When an exiting employee is offered compensation at the time of termination, the severance package is usually conditioned on the employee signing a Severance Agreement. The natural tendency is to focus on the financial end of the agreement, but equally important are the provisions that benefit the employer. In negotiations the employer needs to preserve the enforceability of those beneficial terms, and the employee needs to make certain that he or she is being adequately compensated and is not surrendering rights that will sacrifice valuable causes of action or make finding future employment difficult.

Here are some of the important factors that should be considered during the negotiations:
  • Release: One of an employer’s most important objective in offering a severance package to an exiting employee is obtaining certain concessions from the employee. One such concession is a release. By signing the agreement, the employee surrenders his or her right to pursue various claims against the employer. Typically, releases are broadly drawn. An employee will give up all claims that may have arisen from the date of hire through the date the employee signs the severance agreement. Federal and state laws impose restrictions that can limit the scope of the release, but generally if an employee feels he or she has been wrongfully terminated, deprived of compensation, retaliated against for exercising legal rights, or has been the victim of employment discrimination, the employee should carefully consider the implications of the release and its value. Alternatively, if an employer is concerned that an employee holds a valid claim, it should consider the adequacy of the compensation offered to the employee, and the possible limitations imposed by the law on the effectiveness of the release.
  • Non-Competition: The employer may wish to limit the employee’s ability to compete with the company following his or her termination. Limitations of this type must strike a balance between the employee’s need to obtain a new job, and the employer’s right to protect itself from unfair competition. The protections provided to the employer must be reasonable, and cannot unfairly restrict the employee’s ability to seek new employment.
  • Non-Disclosure: Although Connecticut law protects trade secrets, an employer may seek to impose contractual restrictions on an employee who had access to confidential information during his or her tenure. Trade secrets can include pricing structures, business plans, and manufacturing techniques. It is information that is not generally known to the public and that the company treats as proprietary. Negotiating a non-disclosure provision requires application of another balancing standard. The employer wants to ensure that it has adequate protection, and the employee wants to avoid being obligated in perpetuity to refrain from disclosure of information that may not actually be worthy of protection.

At the start of employment, an employee is often asked to sign an Employment Agreement. The agreement may define the amount of severance that an employee is entitled to receive upon termination. It could contain its own non-competition or non-disclosure language. Likewise, the employer may have a company employment manual that contains terms relevant to the Severance Agreement. The Severance Agreement must be considered in the context of existing employer policies or contracts.  All agreements and policies in effect with the employer have to be examined in the context of the severance agreement.

A Severance Agreement is subject to the requirements imposed by law on any contract. One requirement is the need for the parties to exchange something of value. The employee may be furnishing a release, and restricting her future employment opportunities. In exchange, the employer must provide the employee with adequate monetary compensation. If the employer has, in a prior agreement, already promised the employee the exit package that is offered in the Severance Agreement, additional compensation may be necessary in order to make the restrictions imposed by the Severance Agreement enforceable. This highlights the importance of both employment manuals and employment contracts.

By law, the employee must be allowed at least 21 days to review the terms of the agreement for the release to be fully effective. If the employee has not accepted the deal within the time provided, the employer can rescind the offer. The time is meant to allow the employee enough time to consult with an attorney and evaluate the proposed severance package. Once an employee has signed the agreement, the law provides a seven-day period during which the employee can change his mind and retract his acceptance. Both parties to the agreement must be careful to observe the time limitations imposed on the contract. While negotiations progress, the employee should, if necessary, seek extension of the offer’s expiration date.

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