The successful negotiation of severance agreements is an art and a science. A severance agreement is a legal document that is negotiated at or shortly after the termination of employment. The precise language of a severance agreement is important as it will create an enforceable contract to resolve any and all claims that the parties may have against one another. This contract will typically provide the employee with benefits and compensation to which he or she would not otherwise be entitled. It provides the employer with peace of mind and surety against future litigation. In theory, a fair severance agreement is a win-win conclusion to an employment relationship. Employees are rewarded for their labor and loyalty, while the employer who provides generous or fair severance agreements is viewed favorably in the industry. In reality, achieving an amicable break-up can require a good deal of diplomacy.
An experienced Oregon employment law attorney can help you develop a tailored approach to negotiating a severance package. Relevant considerations include the employer’s size and the employee’s position and tenure, as well as the compensation and benefits to which the employee was entitled. These factors must be balanced against any legal claims you may have under Oregon employment law because every severance agreement will require a Release of Claims. This is an enforceable waiver of any causes of action the employee may have against the employer.
Who should negotiate the agreement?
Employees often negotiate their own severance agreements. If the employment relationship is terminating because of non-performance reasons – such as a restructuring or a Reduction in Force – the employer-employee relationship may be quite cordial. But even with terminations that are not driven by simple economics or business decisions, an employee may still find that it is sensible to personally negotiate the agreement. If possible, this preserves goodwill with the employer and ensures that attorney’s fees do not consume the severance pay. Nonetheless, a wise employee will seek an attorney’s advice to negotiate the agreement and to guide the employee’s future conduct under the agreement. The cost of a few hours of attorney’s time in this regard is often money well spent.
In other cases, because of the potential legal claims that an employee (or employer) may have in connection with the termination, or because promises were broken or contracts breached, the best course will be to retain the attorney to negotiate the agreement on the employee’s behalf. Retainers in this event may provide for hourly or contingency fees.
The basis for severance pay
While there is no generally applicable state or federal law that creates a right to severance pay, an employee may be entitled to compensation and benefits as a result of a contractual agreement, or, rarely, as a matter of written company policy. More often, an employer may offer severance pay to a good employee because it is the right thing to do and/or because the employer wishes to buy peace with its former employees. Regarding the latter, any significant severance payment will require the execution of a Release of Claims.
The Release of Claims
The nature and viability of any potential legal claims are paramount in appraising the value of a severance agreement to both employees and employers. For employees, this potential leverage is one reason why it is important to seek legal counsel with a substantial background in employment law (and it is safe to assume that your employer will have done so). Certain options, such as entitlement to file EEOC charges, may not be released. In addition, the release of age discrimination claims triggers special time and notice requirements, e.g., you will have a certain amount of time to consider the release and you will be advised and encouraged to seek an attorney’s advice.
In addition to a release of claims, a severance agreement will also routinely address the employee’s cooperation with legal authorities and response to subpoenas should these issues arise in unrelated litigation or agency proceedings. In addition, severance agreements may provide that an employer will not contest an employee’s eligibility for Unemployment Insurance.
Compensation, insurance, stock options and other benefits
Severance pay is usually measured in terms of annual, monthly, or weekly compensation. While a company may have a general practice with respect to severance pay, each situation is unique. Any ‘rule of thumb’ in the area of severance compensation is of limited value. Severance practices vary by industry and geography and are generally tied to the specific circumstances of a given employment relationship. Some employers provide no severance payments, even to employees with significant tenure. Salaried employees, such as executives, are most likely to be offered some type of severance agreement, although this, too, will depend upon the circumstances of the termination and the employer’s financial resources.
The same goes for fringe benefits, including health and life insurance, the vesting and exercise of stock options, and the provision of outplacement services. For example, based upon the employer’s group health plan and the number of employees, continuation of health benefits under COBRA must be offered to qualified beneficiaries upon the occurrence of qualifying events, such as a termination. Employee benefits may also include vehicle allowances, telecommunication plans, and the use of company computers. The treatment of these benefits upon termination may be subject to negotiation. Any retention of company equipment, however, must be squarely addressed with close attention paid to issues of confidentiality and respect for intellectual property and other proprietary information.
Likewise, the timing of any payout is often negotiable. Payments may be offered in a lump sum or may be structured over months or years according to the employer’s normal payroll practices. Oregon has specific legal requirements for the timing of compensation at termination and all of these issues should be discussed with your attorney. Payment for any earned bonuses and commissions, as well as accrued vacation pay, sick leave, and PTO, will also be covered in a comprehensive severance agreement.
Confidentiality and non-disparagement clauses
Confidentiality provisions are common in severance agreements and non-disparagement provisions are not uncommon. Confidentiality may be sought with respect to the business operations and trade secrets of the employer, while a separate confidentiality provision will typically address the terms of the severance agreement itself. Once the initial shock of termination subsides, the wisdom of a mutual non-disparagement clause may also be apparent.
Non-compete agreements and agreements not to solicit
In Oregon, non-compete agreements are governed by statutory provisions. ORS 653.295. Special rules apply to these agreements. Often these have been addressed prior to employment. Nonetheless, any restrictions or obligations imposed upon employees may be triggered at termination and the employee should seek legal advice concerning the applicable terms and conditions. Non-solicitation and non-disclosure terms may also appear in severance agreements and the implications and enforcement of any such provisions must be carefully considered.
Choice of law and integration provisions
As with the other severance agreement provisions mentioned above, you should discuss with your attorney the meaning and significance of any choice of law and integration provisions in your severance agreement.
Please note that potential tax implications arise with respect to any severance agreement for compensation. Therefore, employees presented with a severance package should seek the advice of a tax professional. Even well-qualified employment attorneys are usually not tax advisors. While I do not provide tax advice, I can certainly discuss the type of tax advice that you should obtain and provide referrals to competent tax attorneys.
Seek the advice of an employment lawyer concerning your severance agreement
This discussion merely highlights the issues that most frequently arise in connection with severance agreements. I routinely counsel employees on the negotiation of such agreements. Seeking the advice of attorneys who have a well-rounded understanding of both severance agreements and employment litigation is strongly advised if you are facing the termination of your employment.