CALL TODAY AT 973.270.0031
What is a Severance Agreement?
A severance agreement is a legally binding contract between an employer and an employee that outlines the terms and conditions of the employee’s departure from the company. This agreement typically includes details about severance pay, which is a form of compensation provided to the employee upon termination. Other elements commonly addressed in a severance agreement include the continuation of benefits, such as health insurance, outplacement services, and any other support the employer will provide to ease the transition. Additionally, the agreement may include clauses related to confidentiality, non-disparagement, and the return of company property.
Severance agreements also often contain specific conditions that the departing employee must adhere to, such as non-compete or non-solicitation clauses, which prevent the employee from working with competitors or soliciting former colleagues or clients for a specified period. These agreements are designed to protect both the employer’s business interests and the employee’s rights, providing clarity and security to both parties during the termination process. Employees are usually advised to review severance agreements with a legal professional to ensure their rights and interests are adequately protected.
What Do Severance Agreements Include?
A comprehensive severance agreement should include key elements such as severance pay, benefits continuation, and clauses addressing confidentiality, non-compete, and non-solicitation. It should specify the amount and schedule of severance pay, detail the continuation of benefits like health insurance, and include any outplacement services offered. Additionally, the agreement must cover the payout of accrued vacation or sick leave, and outline the employee’s obligations regarding the return of company property.
The agreement should also incorporate a release of claims to protect the employer from potential lawsuits, a non-disparagement clause to prevent negative statements from both parties, and clear terms for references and employment verification. Including these elements ensures clarity on rights and obligations, providing a smoother transition for the departing employee while protecting the employer’s interests.
Know Your Severance Package
When crafting a severance agreement, it’s crucial to address several key sections in detail to ensure comprehensive protection for both the employer and the employee. Here’s an in-depth look at the essential components:
Severance Pay
- Amount: Specify the total amount of severance pay. This can be calculated based on the employee’s length of service, position, and reason for termination.
- Payment Schedule: Clarify whether the severance will be paid as a lump sum or in installments. If installments, provide a detailed schedule.
- Tax Withholding: Explain how taxes will be withheld from the severance pay and provide any necessary tax forms.
Medical Benefits
- Continuation of Coverage: Detail how the employee’s health insurance will be continued, including the duration of coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act) if applicable.
- Premium Payments: Specify who will pay the health insurance premiums during the continuation period.
- Other Benefits: Include information on the continuation or termination of other benefits such as dental, vision, life insurance, and disability coverage.
Accrued Vacation and Sick Leave
- Payout Terms: Clearly state how any accrued but unused vacation and sick leave will be paid out. Include specific figures or formulas used to calculate the payout.
Outplacement Services
- Support Offered: Detail any outplacement services provided, such as career counseling, resume writing assistance, and job search support.
- Duration: Specify how long these services will be available to the departing employee.
Confidentiality Clause
- Non-Disclosure Obligations: Require the employee to keep the terms of the agreement and any proprietary company information confidential.
- Consequences of Breach: Outline the potential legal consequences if the confidentiality clause is violated.
Non-Compete Clause
- Scope: Define the types of activities and industries the employee is restricted from engaging in after leaving the company.
- Duration: State the length of time the non-compete restriction will be in effect.
- Geographic Limitations: Specify the geographic area covered by the non-compete clause.
Non-Solicitation Clause
- Client and Customer Solicitation: Prohibit the employee from soliciting the company’s clients or customers.
- Employee Poaching: Prevent the employee from recruiting current employees to join a new employer.
- Duration and Scope: Clearly define how long these restrictions will last and the extent of the restrictions.
Release of Claims
- Waiver of Rights: Require the employee to waive any potential claims against the employer, including claims for wrongful termination, discrimination, and other employment-related issues.
- Legal Validity: Ensure that the release of claims is clearly stated and legally binding.
Non-Disparagement Clause
- Mutual Agreement: Both parties agree not to make negative or harmful statements about each other.
- Scope of Disparagement: Define what constitutes disparagement and the potential repercussions of violating this clause.
Return of Company Property
- List of Items: Provide a detailed list of all company property that must be returned, such as laptops, phones, documents, and security passes.
- Return Process: Explain the procedure for returning these items and any consequences for failing to do so.
References and Employment Verification
- Reference Terms: Outline how the employer will handle references and employment verification for future job searches.
- Standard Language: Provide the standard language that will be used in reference checks to ensure consistency.
Governing Law and Dispute Resolution
- Legal Jurisdiction: State which laws will govern the agreement.
- Dispute Resolution Process: Outline the steps for resolving any disputes that may arise, including mediation or arbitration procedures.
- Legal Fees: Specify who will bear the costs of any legal proceedings related to the severance agreement.
Effective Date and Signatures
- Commencement Date: Clearly specify when the agreement becomes effective.
- Signatures: Ensure that both parties sign and date the agreement to acknowledge their acceptance of its terms.
Including these detailed elements in a severance agreement ensures that both parties have a clear understanding of their rights and obligations, minimizing the risk of future disputes and providing a smoother transition for the departing employee.
Why Do Employers Often Give Unfair Non-Compete Agreements?
Employers may sometimes offer severance packages that are unfair or incomplete for several reasons, often driven by a mix of economic, strategic, and legal considerations. Understanding these reasons can shed light on the complexities behind severance negotiations and the importance of seeking legal advice when faced with such situations.
Cost-Saving Measures
One of the primary reasons employers provide inadequate severance packages is to minimize costs. Severance payments, benefits continuation, and outplacement services can be significant expenses, especially for large companies facing economic challenges. By offering minimal severance packages, employers aim to reduce their financial burden during layoffs or restructuring.
Lack of Standard Policies
In some organizations, there may be no standardized severance policy in place. This can lead to inconsistent and often inadequate severance offers. Without clear guidelines, managers may offer packages based on personal discretion, which can result in unfair treatment of employees.
Avoiding Legal Liabilities
Employers might provide insufficient severance packages to avoid potential legal liabilities. By offering only the bare minimum, they hope to limit the scope for future claims or disputes. However, this can backfire if employees feel compelled to seek legal recourse for fair compensation.
Retaining Competitive Advantage
In certain industries, employers may intentionally offer restrictive severance packages to prevent former employees from joining competitors. By including non-compete or non-solicitation clauses without adequate compensation, they aim to protect their business interests. These restrictive covenants, if not paired with fair severance terms, can significantly disadvantage employees.
Power Imbalance
During severance negotiations, there is often a significant power imbalance between the employer and the employee. Employers, particularly larger organizations, have more resources and legal expertise at their disposal. Employees, on the other hand, may feel pressured to accept an unfair package to avoid prolonged unemployment or legal battles.
Insufficient Legal Knowledge
Employers may also provide incomplete severance packages due to a lack of legal knowledge or awareness. Small businesses, in particular, may not fully understand the legal requirements and best practices for severance agreements. This can result in offers that fail to meet industry standards or legal obligations.
Strategic Downsizing
In cases of strategic downsizing, employers may offer inadequate severance packages to expedite the process. By providing minimal compensation, they can quickly reduce their workforce without engaging in lengthy negotiations or legal disputes. This approach, however, can damage the company’s reputation and employee morale.
What Should I Do Before I Sign a Severance Agreement?
Signing a severance agreement is a significant decision that can impact your financial future and career prospects. Before you sign, it’s crucial to take the following steps to ensure you fully understand the agreement and protect your interests:
Understand the Terms
- Severance Pay: Review the amount and schedule of severance payments. Ensure you understand whether you will receive a lump sum or installment payments.
- Benefits Continuation: Check details about the continuation of benefits such as health insurance, life insurance, and retirement benefits. Understand the duration and any associated costs.
- Accrued Vacation and Sick Leave: Confirm the payout for any accrued but unused vacation or sick leave. Ensure this is clearly stated in the agreement.
Evaluate the Impact on Your Career
- Non-Compete Clauses: Review any non-compete clauses that restrict your ability to work in your industry or geographic area. Understand the scope, duration, and geographic limitations.
- Non-Solicitation Clauses: Check if there are restrictions on soliciting the company’s clients, customers, or employees. Understand how these clauses might impact your future job opportunities.
- Confidentiality and Non-Disparagement Clauses: Ensure you understand any obligations to keep company information confidential and refrain from making negative statements about the company.
Seek Legal Advice
- Review: Have an experienced employment lawyer review the agreement. They can identify any unfair terms or potential legal issues.
- Explain: Your lawyer can explain the legal consequences of the agreement, including any clauses that may affect your future employment.
- Negotiate: If necessary, your lawyer can help negotiate better terms to ensure the agreement is fair and reasonable.
Ask for Clarifications
- Clarify Terms: Make sure all terms are clear and understandable. Don’t hesitate to ask your employer for explanations on any ambiguous or unclear terms.
- Written Modifications: If any changes are agreed upon during negotiations, ensure they are documented in writing and included in the final agreement.
Consider Alternatives
- Alternative Provisions: If you find certain terms overly restrictive, discuss potential alternatives with your employer. For example, you might negotiate a shorter non-compete duration or a narrower geographic scope.
- Enhanced Benefits: Consider negotiating for additional benefits such as extended health coverage, outplacement services, or a higher severance pay.
Document Everything
- Keep Copies: Retain copies of the signed agreement and any related documents. This includes emails and notes from negotiations.
- Record Discussions: Document any verbal agreements or promises made by your employer during the negotiation process.
How NJ Employment Lawyers, LLC Can Help
At NJ Employment Lawyers, LLC, we specialize in employment law and are committed to protecting your rights during severance negotiations. Our experienced attorneys can review your severance agreement, explain its terms, and negotiate on your behalf to ensure you receive a fair and comprehensive package. Contact us today to discuss your situation and explore your legal options.