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Legal Guidance on Severance Agreements

“You’re fired!” is an infamous phrase made more popular by our current president. Workers in the current economy have heard that phrase more frequently. In employment-at-will states like Tennessee, Arkansas or Mississippi, without a contractual obligation to pay severance or separation pay, employers are not required to give workers advance notice of termination or any compensation upon termination of employment. Frequently, in exchange for a full release of claims, a non-competition or non-solicitation clause, trade secret confidentiality, or other favorable term, employers will offer workers they fire some form of severance or separation pay.

This offer of severance pay is typically contained in a written agreement. There is no legally mandated formula to determine a “fair” severance amount. Some companies have established written severance protocols that are published to employees. Other companies have unwritten practices by which they calculate severance offers. Generally, companies are not legally bound by these polices or practices. However, companies cannot illegally discriminate when offering employees payments based on an employee’s sex, race, national origin, age, color, religion, and so forth.

Whether the amount is negotiable depends on many factors. If severance is offered as part of a ‘reduction in force’ the company might predetermine the amounts or a formula in order not to favor one employee over another. In other cases, an employee can negotiate a higher amount or other favorable terms based on: length of service; the company’s desire to change a contractual provision such as a non-competition agreement; a potential legal claim for discrimination, harassment, personal injury, or unpaid wages; and other points of negotiating leverage. A worker’s last paycheck, vested vacation, and sick or personal time off (PTO) are different payments, separate from severance, calculated and paid separately.

While the amount of severance pay is important, it is also important that all other terms be carefully negotiated. Federal law (the Older Workers’ Benefit Act and the Age Discrimination in Employment Act) requires that employees over 40 be given 21 days to consider whether to sign a release, 7 days to revoke the release after signing the release, and he/she must be advised in writing to consult an attorney. New or revised terms regarding non-competition or solicitation of customers or employees must be tailored to the specific situation. There is no such thing as a ‘standard severance agreement.’ Each situation is unique.

Employees and employers alike should consult legal counsel before signing or publishing these agreements. Releases should not extinguish ongoing legal claims such as EEOC complaints, wage and hour disputes, workers’ compensation claims and other ongoing claims unless the agreement provides sufficient consideration for the release. Whether a severance payment is sufficient to fairly compensate the employee for releasing a potential or ongoing legal claim or to help bridge the time until he/she finds a new job is complicated. Companies are wise to offer a sufficient and fair amount. Employees are wise to hold out for a sufficient and fair payment if possible. Consulting an experienced employment law attorney is a smart play for both parties.

Employees are protected by a number of state and federal workplace laws. Some of these laws — as well as court decisions — govern employment agreements, so it’s important that you know your rights under the law before you negotiate, sign or pursue claims under an employment agreement. The wisest move you can make right now is to consult with an experienced employment attorney to help you determine the best way to move forward.

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