By Jonathan K. Driggs, Attorney at Law
Last month I discussed the common practice to having employees sign release agreements in exchange for severance pay. This month, let’s discuss a few more things about how to effectively use these agreements. Outside of the Older Worker Benefit Protection Act—which applies to release agreements for employees 40 years and older who are being asked to waive claims under the Age Discrimination in Employment Act (the topic of discussion for next month), the specific terms for release agreements are not specifically laid out by statute.
However, common sense and fair play—in addition to well established principles of contract law—should all be taken into consideration. The courts also recognize that there is a difference in bargaining power between an employer and employee. As a result, they can be pretty quick to void agreements when it appears that employees were coerced into signing or were befuddled by its contents. While a detailed discussion of all of the “do’s and don’ts” of release agreements is beyond the scope of this article, the following are a few important things to consider:
Consideration: according to long establish contract law, in order to have a binding contract between parties, each party needs to get something of value beyond that to which they would already be entitled (i.e., “consideration”). Generally, the courts haven’t required this “something of value” to be of a particular amount, or necessarily a large amount. The employee must simply get something of value he or she would not have otherwise received had he or she not signed the agreement. Using bonuses, cash outs of PTO or final wages will not suffice as consideration so long as the employee already has a right to receive these things (which they clearly do at least in the case of final wages). Practically speaking, if the consideration is a very small amount, the employee may not feel it is worth signing the agreement.
Confidentiality provisions: Many agreements require the employee to maintain the confidentiality of the terms of the agreement (with allowances for informing their accountant, attorney and close family members, with a requirement that the employee requires these third parties to also not disclose the terms). An employer recently successfully enforced such a provision against a former employee after his daughter announced on Facebook the amount of the settlement between the parties (as well as publishing a few choice words directed at her father’s former employer and stating that the money would allow them to take an European vacation)—resulting in a forfeiture of the $80,000 settlement amount! My, my, my, wouldn’t it have been fun to be a fly on the wall during that daddy-daughter discussion? (and it really is too bad because I hear that Paris is just lovely in the Spring!)
Use your leverage to serve your legitimate purposes: We all know it can be frustrating to get departing employees to return company property like laptops and confidential/proprietary documents. Severance agreements can be an effective way to get employees to cough these things up by making their severance pay conditional upon them doing so (unlike final wages, which in many cases must be paid regardless of whether employees have returned company property). And rather than paying out the severance in a lump sum, I often like to spread it out over time (e.g., pay it out according to the same schedule as their regular salary) as an incentive for the departing employees to “behave themselves” for at least the payout period. For example, if you include a non-disparagement provision in the agreement (which, let’s be honest, can be hard to enforce), you can use the threat of cutting off the severance for non-compliance during time of the payout. This can be helpful during the first few delicate weeks or months following the termination when feelings can be especially raw.
In next month’s article we’ll discuss the requirements imposed by the Older Workers Benefit Protection Act for releasing age-related claims.
This article should not be construed as legal advice. Copyright ©2014 by Jonathan K. Driggs, Attorney at Law, P.C. All rights reserved. Jonathan K. Driggs is an employment law attorney with over 21 years of experience, including 3 years with the Utah Labor Commission. www.jkdlawpc.com
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