So Long, Farewell: Securing Effective Release Agreements

When workers are laid off or let go from their jobs, a prudent employer will send them on their way with a document that’s worth its weight in gold: a separation or severance agreement.

A carefully crafted release agreement that complies with state and federal law provides some extra cash to departing employees while giving employers confidence that they’ve headed off the likelihood of costly, time-consuming claims and lawsuits.

“A lawsuit by someone who works in your mailroom can be just as expensive as a lawsuit by your CEO in terms of the defense costs and the disruption,” said Robin J. Samuel, who handles releases and separation agreements daily as head of Hogan Lovells’ California labor and employment practice.

He recommends that every employee who moves on involuntarily be offered some severance pay in exchange for inking a separation agreement, saying it’s a small price to pay for peace of mind. “It gives both sides certainty as to the end of the relationship,” Samuel said. “It defines who has to do what. It can remind employees of their obligations. You should call out any confidentiality agreements and nondisparagement obligations, and if you don’t have those in place, you can even build them into separation agreements.”

Employees who receive severance pay are far less likely to consult an attorney to see if they can sue their ex-employer for race, gender or age discrimination or for other reasons, said Howard M. Knee, a labor and employment attorney in the Los Angeles office of Blank Rome. “The severance agreement really minimizes the likelihood of litigation,” he said.

Release agreements can be especially valuable for members of groups that have special protections, including those who are covered by anti-discrimination laws encompassing age, sex and race, as well as those who have filed a workers’ compensation claim after an on-the-job injury. The agreements can also be beneficial when California employees have taken sick leave in the 30 days before they were terminated; the state’s new sick-leave law, which takes effect July 1, 2015, contains an unusual presumption of retaliation.

“For those high-risk groups, you definitely get a bargain, so to speak, by offering them some severance or separation pay in exchange for a release,” Samuel said, “because a lawsuit or an agency investigation triggered by a claim or a complaint will cost the company much more than paying some severance.”

Knowingly and Voluntarily

At the heart of a valid severance agreement is the condition that it is signed knowingly and voluntarily. Employees should never be forced to agree to terms without being given time to read through the document and, if they wish, to consult a lawyer for advice or to ask questions of the company’s human resource professionals. Timing is important, too. Distributing the agreement on a Friday afternoon to agitated workers clearing out their desks could be construed as exerting pressure.

Under federal age-discrimination laws, workers 40 and older who are being laid off or fired must be allowed 21 days to review a severance agreement and an additional seven days to change their mind after they sign it, Knee said.

Release agreements need to be written in clear language, free of any legal jargon and long, dense paragraphs. The onus for creating this straightforward document falls on the employer, which should ask its lawyers to draft text that explains the types of claims that are being waived and what the employee is receiving in exchange for signing. “The more clear the language is, the harder it would be for an employee to claim they didn’t know what they were signing,” said Nora Kersten Walsh, a labor and employment attorney with Schiff Hardin in Chicago.

Samuel said he often sees impenetrable prose studded with acronyms such as ADA, FLSA and ERISA. “Ninety-nine percent of employees, they don’t know what it’s talking about,” he says. “They’re not lawyers. They don’t understand the statutory references. It would be pretty easy for someone to come into court and say, ‘I didn’t understand I was waiving my right to sue for age discrimination. I didn’t know what the Age Discrimination in Employment Act says.’ ”

The agreements Samuel draws up list claims by type and offer a simple explanation of each statute’s terms. Samuels also spells out rights that cannot be waived, including the right to receive unemployment benefits and workers’ compensation benefits. It’s illegal under California law for an employer to demand that workers give up any compensation they’ve earned, whether it’s wages, bonuses or overtime. Employees are entitled to this money even if they refuse to sign the release—though the release can offer additional cash if they agree to forgo claims to any additional compensation.

EEOC and NLRB

A severance agreement also cannot limit or eliminate the authority of federal and state agencies to investigate alleged violations of labor law. The Equal Employment Opportunity Commission (EEOC) and the National Labor Relations Board (NLRB) have been challenging the terms in some release agreements, claiming that the agreements curtailed the agencies’ ability to investigate and prosecute violations. Employees cannot waive their right to file a charge with the EEOC or to cooperate with or participate in an investigation. Employers should ask their legal teams to review the language in their release agreements to make sure it will pass muster should federal agencies become involved, Walsh said.

Finding the right balance is key. A well-drafted release agreement has the employee waive all claims against the company but does not prohibit him from filing a complaint with a state or federal agency or from participating in an investigation or audit conducted by these agencies. A release should also clearly identify the time period covered in the agreement. In California, releases can waive claims only retroactively—that is, up to the date the employee signs the release.

Noncompete Clauses

Noncompete clauses in separation agreements are enforceable in some states. California isn’t one of them. In fact, unless you’re selling a business, a noncompete clause has the potential to invalidate the entire release, Samuel cautioned.

An employer can include terms that prohibit departing employees from soliciting former colleagues for a new venture, but there’s no way to prevent workers from following a departing colleague. A release also can include terms that prohibit workers from revealing trade secrets or using confidential, proprietary information to compete with an ex-employer, Knee said.

How to Handle Taxes

Almost all forms of severance pay are considered wages and “salary continuation,” Samuel said. That means the employer must pay its share of payroll taxes on the money—which is usually taxed at a higher, supplemental rate than regular income—and the employee is responsible for individual payments as well. The severance agreement should spell out how withholding and taxes will be handled. A carefully executed release agreement will also explain that receiving severance pay doesn’t disqualify employees from seeking and obtaining unemployment benefits down the line.

Wrapping Things Up

A separation agreement may refer back to itself as “a complete and final agreement among the parties,” Samuel said, noting that this is important because the employee may have previously signed other agreements that the employer may want to keep in effect. If that’s the case, be sure that the separation agreement spells out what obligations you want to preserve, he said.

Ideally, each worker should have also signed a confidentiality agreement when she was hired, along with a document assigning to the company any inventions she created as part of her work duties. An employer can include those terms in the severance agreement with a retroactive clause.

Remember that no cookie-cutter release will apply to every employee and every situation. Terms should be tailored to specific circumstances. For example, employees over age 40 must be notified of special provisions in the Older Workers Benefit Protection Act.

Releases involving foreign workers in the United States on visas should spell out if the employer will pay—and how much—to return them to their homelands and under what timetable.

June D. Bell is a San Francisco-based legal affairs reporter and regular contributor to SHRM. She can be reached at june@junebell.com.