Severance can help cushion the blow of a layoff or firing. But let’s be honest: Most companies offer it with more than just employees’ interests in mind. "We live in a very litigious society, particularly in the employment space," says Jonathan A. Segal, an employment attorney with Duane Morris LLP in Philadelphia. "Employers can buy peace by providing severance or other benefits in exchange for a [signed] release" stating that the departing worker won’t sue the company.
Increasingly, however, it would seem that peace can’t always be bought. Several recent actions taken by federal agencies spotlight the risk employers face when they craft severance agreements that require workers to provide something in return for receiving pay or other benefits.
For example, last summer, the U.S. Securities and Exchange Commission (SEC) became the latest agency to punish employers for requiring workers who receive severance pay to waive their right to receive payment in legal claims. In rulings decided less than a week apart, the SEC directed Atlanta building products firm BlueLinx Holdings Inc. and California insurer Health Net to pay more than $600,000 to settle charges that their severance provisions violated securities law. In addition, BlueLinx agreed to stop requiring employees to get company approval before reporting possible SEC violations to the government.
The U.S. Equal Employment Opportunity Commission (EEOC) has also been looking closely at severance packages that require employees to give up their right to sue, and, in the end, employers may have to change their policies. Organizations that cross the line can face costly litigation. For example, in 2013, the agency won a landmark case arguing that the Illinois book distributor Baker & Taylor interfered with employees’ right to file a discrimination complaint with its "overly broad, misleading and unenforceable severance agreement."
Finally, guidance released by the National Labor Relations Board’s (NLRB’s) general counsel in 2015 stated that nondisparagement clauses and other provisions typically included in severance agreements are illegal because they violate employees’ guaranteed right to concerted activity.
All these developments raise a question: Are employers that use severance agreements buying trouble instead of peace? Not necessarily—but crafting clear policies that can’t be interpreted as interfering with employees’ right to sue is key, legal experts say. Moreover, HR should never attempt to take on the design of severance policies without help. "A severance policy can’t be something that HR alone owns," says Adam Calli, SHRM-SCP, founder of and principal consultant at Arc Human Capital LLC in Woodbridge, Va. "You need to have HR, finance and other members of the C-suite in one room to hammer out a severance policy, preferably when things are calm," says Calli, who is also an HR instructor at George Mason University in Fairfax, Va. "An organization’s leadership needs to talk about how severance aligns with its corporate culture, budget and strategic goals."
[SHRM members-only toolkit: Designing and Administering Severance Pay Plans]
The Layoff Payoff
While employers have no legal obligation to provide pay or other benefits when they terminate employees, most do opt to provide severance packages. About two-thirds of U.S. employers have written severance policies in place, according to data from Lee Hecht Harrison, an outplacement services firm.
HR professionals cite many reasons for entering into severance agreements that go beyond seeking protection from lawsuits. For one thing, such policies help both the employee and employer to end the employment relationship on a positive note. "We hope that, if we treat folks well on the way out, they will treat us well," says Sharon Palmeter, SHRM-SCP, vice president for human resources at Dovel Technologies, a McLean, Va.-based technology firm.
Indeed, at a time when many workers feel a complete loss of control, a severance agreement can "help the employee maintain some dignity," says Robert Farmer, SHRM-SCP, a senior vice president at Missoula Federal Credit Union in Missoula, Mont.
Severance can also help a company meet its financial and business goals, Calli says. While some executives may balk at the idea of paying employees who aren’t working, doing so can save money in the long run, especially if offering severance helps lower unemployment insurance costs. Moreover, in situations where employees know a layoff is imminent, employers can use the promise of severance to entice workers to stay on for as long as they are needed, rather than seeing them leave en masse in search of new jobs.
‘An organization’s leadership needs to talk about how severance aligns with its corporate culture, budget and strategic goals.’
—Adam Calli, SHRM-SCP, Arc Human Capital LLC
As for who is eligible for severance and what they’ll receive, employers generally have broad discretion here. Nearly all organizations base severance on years of service, according to a 2014 WorldatWork survey, although some also take into account factors such as an employee’s position, pay and whether there is an employment contract in place. No matter what approach you take, the most important thing is to be consistent.
"You want to be careful about giving different severance terms when performing a group separation," says attorney Kristin Michaels of McDermott Will & Emery in Chicago. "Otherwise an employer can open itself to a claim that it has acted discriminatorily."
The policy at Dovel Technologies allows for flexibility in details such as last day, how the announcement of an employee’s departure is made and, in certain instances, the details of a noncompete clause, but the company leaders are careful to ensure that they are adhering closely to the terms of the arrangement.
"We follow our agreement guidelines to a T," Palmeter says.
Want to Silence Former Workers?
When showing a worker the door, employers often try to neutralize the situation by offering money or perks in exchange for a promise that the worker won’t file a legal claim, badmouth the company or cause other problems. But there’s a catch. Section 7 of the National Labor Relations Act (NLRA) guarantees employees the right to act together to try to improve their pay and working conditions and prohibits organizations from interfering with people’s ability to exercise that right. To many employers’ surprise, the law applies whether or not workers are unionized. Severance packages that ignore NLRA provisions may result in lengthy and costly litigation.
Here are some common traps—and tips for avoiding them.
Blanket waivers are a red flag, says Harold Datz, a labor law professor in Washington, D.C., and retired chief counsel at the National Labor Relations Board, which adjudicates NLRA complaints.
In fact, steer clear of any provision that requires employees to waive their right to file a claim in exchange for receiving severance pay or other benefits, he says. "The law is pretty well-established when it comes to employers requiring workers to sign away their right to concerted activity," Datz says. "Generally speaking, it’s illegal."
Nondisparagement clauses must not be so broad that they prevent workers from acting collectively, according to attorney Kristina Spitler of Vanderpool Frostick & Nishanian PC in Manassas, Va.
Confidentiality provisions could violate the NLRA if they could reasonably be interpreted as prohibiting employees from discussing the terms of their severance or other workplace matters with their co-workers, Datz says. Of course, many employers would prefer that workers didn’t share information about their pay and benefits with their co-workers. But having policies that prohibit such dialogue is looking for trouble.
Nonsolicitation clauses could run afoul of the NLRA if they are overly broad, according to Datz. Even if a company’s main concern is preventing former employees from stealing away staff, these types of provisions could be illegal “if they could be interpreted as blocking workers from soliciting their co-workers to join in opposition to wages or working conditions,” he says.
Employers can avoid NLRA problems by including a clause in their severance agreement clarifying that nothing in the pact should be construed as requiring a waiver of any rights guaranteed by law, Datz says. However, such a provision must be set forth in a prominent place in the agreement and not buried in the fine print.
Waivers Lose Favor
Hammering out the details of severance packages has always been a balancing act. It requires employers to calculate both the direct cost of their policy as well as indirect ones, such as the influence on morale that severance packages could have on the employees who remain with the company. But the trickiest part is ensuring that your agreement will pass legal muster, and that issue is only getting thornier now that federal agencies are paying closer attention to employers’ severance policies.
About one-third of employers with severance agreements set a minimum payment of two weeks’ pay. 20% offer at least one month’s salary.
Source: WorldatWork, Severance and Control Plans (2014).
Given the stepped-up enforcement climate, it’s more important than ever that employers review their severance policies and consult legal counsel. Here is advice for ensuring that your practices reflect the government’s current thinking:
Be clear that you’re not asking employees to waive their right to sue. Many companies have long conditioned severance on employees signing waivers in which they agree not to litigate against them—but that option has become a risky one. In the wake of the Baker & Taylor ruling, HR professionals should ensure that their severance agreements include prominent language emphasizing that nothing in the agreement should be interpreted as interfering with an employee’s right to file a legal claim, Michaels advises.
Repeat and emphasize employees’ rights. The EEOC surprised many when it sued pharmaceutical giant CVS Caremark in 2012, arguing that the company’s severance agreement was overly broad and didn’t clearly communicate that a former employee retains the right to cooperate with government investigators. Even though the severance policy included standard language that expressly protected employees’ right to file a discrimination claim, the EEOC contended that the provision didn’t go far enough, calling it a "single qualifying sentence that is not repeated anywhere else in the agreement." Although the suit was dismissed on technical grounds, some experts believe it’s a sign of the times with regard to government scrutiny.
‘You want to be careful about giving different severance terms when performing a group separation.’
—Kristin Michaels, McDermott Will & Emery
The Occupational Safety and Health Administration (OSHA) is also cracking down on waivers that inhibit an employee’s right to file a legal claim. In policy guidance issued last summer, MaryAnn Garrahan, director of OSHA’s whistle-blower protection programs, said the agency would not approve any settlements between employers and employees that include so-called gag provisions, which discourage employees from filing whistle-blower claims in which they report employer actions that are illegal or unhealthy or that violate specific public policies.
In light of the OSHA guidance and the 2016 SEC BlueLinx and Health Net rulings, Segal advises that employers review their agreements and add language clarifying that waivers of an employee’s right to collect monetary relief in a lawsuit don’t apply to whistle-blower claims.
Be careful when adding "nondisparagement" language. "Agreements with ‘broad confidentiality or nondisparagement clauses’ are particularly suspect," according to Garrahan. The agency’s logic is that it is impossible to sue an employer without disparaging it. So, if a company prohibits former employees from criticizing it at all, it has effectively prevented them from suing, which is illegal. OSHA will also be cooperating with the SEC to bar agreements that require workers to waive their right to receive monetary awards from any government agency.
[SHRM members-only policy: Severance Pay Policy]
Although the agency’s primary interest is OSHA settlements, it’s not a stretch to assume that the same restriction would apply to severance agreements, legal experts say.
Employers in the habit of keeping disgruntled workers mum got a reality check in 2015 in the form of guidance from the NLRB’s general counsel, Robert F. Griffin Jr. He deemed a long list of common employer practices illegal because of their potentially "chilling effect on employees’ Section 7 [of the National Labor Relations Act] activity."
Examples of nondisparagement policies that the general counsel denounced:
"Do not make ‘[s]tatements’ that damage the company or the company’s reputation or that disrupt or damage the company’s business relationships."
"Never engage in behavior that would undermine the reputation of [the employer], your peers or yourself."
"Being insubordinate, threatening, intimidating, disrespectful or assaulting a manager/supervisor, co-worker, customer or vendor will result in" discipline.
‘The worst way to find out if [a policy] is lawful is to have an employee file an unfair
labor practice charge with the NLRB.’
—Kristina Spitler, Vanderpool Frostick & Nishanian PC
It’s important to carefully weigh the risks of nondisparagement clauses—in severance agreements as well as general policies—in light of Griffin’s position that the guidance is supported by NLRB case decisions, advises attorney Kristina Spitler of Vanderpool Frostick & Nishanian PC in Manassas, Va.
"The worst way to find out if [a policy] is lawful is to have an employee file an unfair labor practice charge with the NLRB," she says.
Think about how, and when, to communicate your policy. Some employers state their severance policy in their employee handbook or post their policies online. This approach has the benefit of being easily accessible to employees, but it carries legal risks—for the same reason. "Even if a company wants employees to know it has every intention of taking care of them in the event of a layoff, it may not be in a financial position to pay those benefits when the time comes," Calli says. "If a severance policy is mentioned in the employee handbook, it could be interpreted as an implied promise that the employer is contractually obligated to keep."
By taking a thoughtful, collaborative approach to designing severance policies, HR professionals can take care of their departing employees while minimizing the organization’s legal risk, which helps keep the peace for everyone.
Rita Zeidner is a freelance writer in Falls Church, Va.
Illustration by Dan Page for HR Magazine.
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