General discussion concerning severance and separation agreements from a business owner’s perspective.
One topic I get a lot of questions about is severance and separation agreements.
Generally, severance refers to giving an exiting employee a monetary bonus or settlement above and beyond their regular compensation. A separation agreement usually refers to an agreement wherein the exiting employee promises not to sue, file a regulatory agency complaint, take business or information with them, or compete with their former employer. In return, the employer gives the employee something of value (usually money).
So, a business could give an exiting employee severance without a severance or separation agreement, but usually doesn’t use a separation agreement without awarding some form of severance (i.e., consideration). If this is confusing, the below will hopefully clarify my point.
Recently, a client asked me about a separation agreement for an employee over the age of 40.
Relative to dealing with an employee who’s 40 or older, if the employer is seeking a release of all claims pursuant to the Age Discrimination in Employment Act (ADEA), there’s a 21/7 rule that applies. Under the rule, which is actually contained in Section 201 of the Older Workers Benefit Protection Act, a release of claims under the ADEA is only valid if the employee’s release is “knowing and voluntary.” More specifically, in order to be “knowing and voluntary,” the exiting employee has 21 days to review the agreement, with or without legal counsel, and has an additional seven days in which to revoke their signature (beyond the initial 21 day review period). Other requirements may apply given certain considerations. In short, depending on the nature of the separation agreement, the 40 and older employee might have rights not afforded to younger employees.
Regardless of the exiting employee’s age, a separation or severance agreement that’s intended to release the employer from all known or unknown claims is essentially the employer’s purchase of the employee’s agreement not to sue or file a complaint with a government agency, not to take business or information to a competitor, or sometimes, to not even work for a competitor.
When I’m initially contacted about this type of employment agreement, I ask the client why they think they need such an agreement. More specifically, what are your goals/purposes: to reward an exiting employee for tenure and/or quality of service, to prevent a lawsuit or complaint from being filed, to protect the confidentiality of company secrets and information, to prevent an employee from competing with them, or a combination of the aforementioned?
Businesses often ask:
* Should we offer severance to an exiting employee?
* When should we offer it?
* How much should we offer?
* Are the terms negotiable?
* Should we ask an exiting employee to sign a separation agreement that includes noncompete and confidentiality clauses?
* What about protected class considerations (e.g., race, sex, age, disability, etc.)?
* What will my other employees or competitors think if they find out that an employee signed such an agreement or received severance?
In order to help the employer focus on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. In order to help focus the employer on what issues they need to resolve, a business should analyze whether the exiting employee has been contentious or dropped hints of a lawsuit or complaint, or commented about the competition or competing with the employer. If an employer believes that an employee will sue or complain to a regulatory agency, then a separation or separation agreement should be strongly considered. If a lawsuit, complaint or any other factors of the employee’s exit isn’t a concern, then a severance or even no action might be appropriate.
Keep in mind, that unless there’s a contract or agreement to the contrary, or obligations under the Worker Adjustment Retraining & Notification Act (WARN), severance isn’t necessarily required, and in many instances an employee can just leave.
Clients typically ask whether by offering an employee a severance, separation, or some hybrid agreement, they’re setting a legal precedent within their company or creating a feeling or belief of entitlement to such a benefit among employees. In short it’s not likely that the company will be legally obligated to offer the same to other employees. However, if other employees learn about such agreements, there’s a greater degree of possibility that a sense of entitlement will result. So, when deciding whether to use a separation or severance agreement, a business should consider the impact on employee morale, and to at least some extent consider the legal ramifications of using such an agreement.
One way of reaching a bottom line for these agreements is that an employer should not enter into an agreement with an employee, and have to engage an attorney, unless the employer is reasonably sure that they’ll obtain a benefit from the transaction that they wouldn’t get in the normal course of business. Ultimately, as with most business decisions, whether to utilize an agreement or not is a cost versus benefit analysis.
Consistent with the disclaimer on found on my website, the above is a general discussion–i.e., every specific issue or case leads to its own specific resolution and should be handled accordingly.
As a labor and employment attorney and businessperson, Charles Krugel has represented management in hundreds of negotiations, in-house and 3rd party proceedings. Charles has over 13 years of experience in the field and he has run his own successful management side practice for the past 7 years.
Category: Legal
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Labor & Employee Relations/Law
Continued from previous article “Why Utilize an HR Attorney as a Consultant?”
Labor & Employee Relations Defined
These are two distinct categories which are often confused with one another because they somewhat overlap.
Generally, labor law refers to the body of laws and rules regulating labor unions and associations and their relationship with management. Such laws include the National Labor Relations Act and other similar federal, state and local labor laws or ordinances. These laws and regulations permit employees to organize, elect representation and enter into legally binding contracts with management.
Generally, employment law concerns the body of laws and rules regulating civil rights and non-union related conduct in the workplace. Civil rights include a workplace free from discrimination and harassment for people (it need not be an employee) who fit into one of the legally protected classes (e.g., race, gender, disability, national origin, religion, military status, pregnancy, and in some instances sexual or gender orientation). Conduct laws refer to equal and fair pay, immigration and employment-at-will laws. Like labor laws, these are federal, state and local laws.
Labor & Employee Relations Defined
On the macro HR level, labor relations refers to the philosophy a business adopts for dealing with labor unions, union organizing and employee associations. On the micro level, this refers to practices and rules for dealing with individual employee issues relative to unions and associations.
Employee relations refers to the ideology (macro) a business adopts for dealing with harassment and discrimination and other employee issues, unrelated to labor unions or associations. This may include communication, discipline, recognition and payroll policies. On the micro level, it generally refers to how these laws and rules are applied to individual employees.
Examples of Labor & Employee Relations and Law in the Workplace
A supervisor receives a complaint from an employee concerning racial harassment in another department. Thinking that this has nothing to do with her department, the supervisor tells her employee to ignore it, and let the supervisor of the other department handle it. The issue “falls through the cracks.” Subsequently, a fight breaks out between employees in the other department. One employee is hospitalized with injuries. Another employee is arrested and fired. The arrested and fired employee is a minority who files a civil rights complaint for racial harassment and a lawsuit for wrongful discharge, intentional infliction of emotional distress and negligence. The company has little to no supporting documentation to show that it did anything to determine whether or not racial harassment existed in the workplace. Even if it wins the civil rights complaint and lawsuit, it will either have to pay thousands in legal fees or its employment practices liability insurance premiums may skyrocket.
As a labor and employment attorney and businessperson,
Charles Krugel has represented management in hundreds of negotiations, in-house and 3rd party proceedings. Charles has over 13 years of experience in the field and he has run his own successful management side practice for the past 7 years.
Categories
Why Utilize an HR Attorney as a Consultant?
Continued from previous article “Macro and Micro HR”
Although all businesses with employees practice HR, and some even have an in-house HR people, many businesses still encounter HR related problems.
Moreover, there are legal ramifications associated with many human resources issues that many HR professionals just aren’t qualified to deal with. When these costly and sensitive situations arise, a company needs to rely on a professional who understands the law, enforcement agencies and adjudicators, and macro and micro HR. This is where I come in.
Problems generally start with conflict between business strategy and HR practices (again, macro versus micro). It could be as simple as a business not recognizing that its HR philosophy is out of synch with its business strategy. Subsequently, policies are misinterpreted and misapplied, and costly mistakes occur. Such mistakes include improperly administered performance appraisals and improperly allocated wage and salary increases.
Generally, resolving micro issues, while ignoring the macro issues, will most likely result in that business throwing more money at continually resolving the same issues and continually wasting capital. I have seen this happen again and again.
For example, two unionized companies enter into merger negotiations. Neither company approaches their respective unions in a meaningful or timely manner to discuss integration issues (e.g., compensation, pensions and seniority). Consequently, each union commences campaigns to destroy the merger. There is further talk of boycotts, slowdowns, “blue flu,” and other obstacles. Thus, fear and misunderstanding among each company’s officials and customers bring merger discussions to a halt. Eventually, both companies call off the proposed merger.
Or consider this example: Company officials hear of a union organizing campaign. In order to prevent unionizing, the company commences an overly aggressive union prevention campaign which incorporates talk of layoffs, relocation and creating new compensation and benefits policies. Consequently, the prospective union fights back by proliferating fear and filing agency complaints (e.g., unfair labor practices charges), which the company now has to defend. Thus, productivity decreases, expenses increase, morale deteriorates and the potential for unionization is significantly increased.
Poorly aligned macro and micro HR practices led to the above discussed problems. The fact is, in order to prevent money from escaping out the “back door,” a business needs to anticipate and fully understand HR related problems before they arise or escalate.
I will be explaining more on Labor & Employment Relations/Law in my next article. Do look out for it.
As a labor and employment attorney and businessperson,
Charles Krugel has represented management in hundreds of negotiations, in-house and 3rd party proceedings. Charles has over 13 years of experience in the field and he has run his own successful management side practice for the past 7 years.