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A severance agreement is a contractual document an employer provides to an employee when their employment ends. This agreement outlines the terms of the employee’s departure, including any compensation or benefits they’ll receive. For employees, understanding what should—and shouldn’t—be included in a severance agreement is crucial to protecting their rights and maximizing potential benefits. In this blog, we’ll discuss the essentials and red flags to consider when reviewing a severance agreement.
Key Components of a Severance Agreement
A well-structured severance agreement should cover several standard components that ensure the employer and employee understand the terms of separation. Here’s what should be included:
1. Compensation and Benefits
Any severance agreement often focuses on severance pay. This section should specify the total amount and payment terms, including whether the payout will be a lump sum or installments. Additionally, this section may address extended health benefits, unused vacation days, or any other earned benefits.
If your employer offers COBRA health coverage as part of the agreement, ensure the specifics are clear, including how long the coverage lasts and who is responsible for the premium payments.
2. Non-Disclosure and Confidentiality Clauses
Most severance agreements include a confidentiality clause that prevents the former employee from disclosing specific company information or terms of the agreement. This may include trade secrets, client lists, and proprietary business practices. While confidentiality clauses are standard, employees should carefully review the language to ensure they understand any limits on what they can and cannot discuss.
A balanced confidentiality clause should protect legitimate company interests without unreasonably restricting the former employee’s ability to discuss the general terms of their employment.
3. Non-Compete and Non-Solicitation Clauses
Non-compete and non-solicitation clauses are common but vary widely in scope and enforceability. Non-compete clauses restrict employees from working for competitors for a specified period and within a specific geographic area, while non-solicitation clauses prevent employees from reaching out to former clients or coworkers.
In 2024, the Federal Trade Commission adopted a comprehensive ban on new noncompetes and restrictions on existing ones. Subsequently, a federal court issued an order stopping the FTC from enforcing the order, and the matter has yet to be resolved.
Nonetheless, in many states, overly restrictive non-compete agreements may not be enforceable, particularly for low-wage workers. It’s advisable to consult an employment attorney if you feel a non-compete clause unfairly limits your future employment opportunities.
Waiver of Claims and Release of Liability
Most severance agreements include a release of claims, meaning the employee agrees not to sue the employer for any reason connected to their employment or termination. While this is standard, it’s essential to read the release language carefully to understand what rights you’re waiving. Some agreements include age discrimination waivers, which must meet additional requirements under the Older Workers Benefit Protection Act (OWBPA) to be enforceable.
Before signing away your right to pursue legal action, it’s wise to consult a professional who can review the release clause’s language and assess its impact on your rights.
5. Mutual Non-Disparagement Clause
A mutual non-disparagement clause ensures that neither the employer nor the employee will speak negatively about each other after separation. This clause benefits both parties, helping to protect the employee’s reputation and the employer’s public image. A well-drafted non-disparagement clause should be balanced, applying equally to the company and the former employee.
What Shouldn’t Be Included in a Severance Agreement
While severance agreements often protect the employer’s interests, certain clauses or terms can be unreasonable or illegal. Here are a few elements to watch out for:
1. Overly Broad Confidentiality Provisions
Some agreements include confidentiality terms so broad they could prevent you from discussing the nature of your job or the reason for your departure. Such provisions can be problematic, particularly if they infringe on your rights to discuss employment matters with other employers or regulatory agencies. Be cautious of any language that seems overly restrictive or unclear.
2. Unreasonable Non-Compete Clauses
An overly restrictive non-compete clause can make it difficult to find new employment, especially if it covers an extended period or broad geographic area. Courts often view restrictive non-compete agreements unfavorably, especially when they limit an employee’s ability to earn a living. If you encounter an excessively restrictive non-compete, you may wish to negotiate the terms or seek legal guidance.
3. Waiving Rights to Unpaid Wages or Benefits
A severance agreement should never ask you to waive rights to unpaid wages, accrued benefits, or legal protections under employment law. Even if you sign an agreement, employers cannot legally withhold wages or benefits you have already earned. If a waiver seems to limit your right to back pay, commissions, or other earned benefits, request clarification or assistance.
Talk To An Employment Lawyer Abut Your Severance Agreement
Knowing what should and shouldn’t be included in a severance agreement is essential for protecting your rights and ensuring a smooth transition. If you need assistance reviewing your severance agreement, reach out to Lipsky Lowe for guidance. Contact us today!