The Law Surrounding Severance Agreements

In today’s complex employment landscape, many employers grapple with the appropriate timing for asking employees to sign severance agreements upon termination. This decision is not merely a matter of convenience; it carries significant legal implications.

Understanding the nuances surrounding severance agreements can help employers navigate potential pitfalls and minimize legal risks.

Understanding Severance Agreements

Severance agreements are legally binding agreements contracts that outline the terms of the separation between an employer and employee. These agreements often include provisions for severance pay, benefits continuation, and confidentiality clauses. 

While employers may view it as expedient to require employees to sign a severance agreement immediately upon termination, this “sign or lose out” approach can often prove counterproductive. It may invalidate the agreement and expose the company to legal risk. 

Why Immediate Signing Can Be Problematic

Requesting an employee to sign a severance agreement at the moment of termination may create a perception of pressure. Termination is often an emotional experience, and employees might feel compelled to sign out of fear or anxiety. This scenario can lead to disputes over the agreement’s validity, especially if the employee later claims they were coerced into signing.

Legal Protections for Older Employees

The Age Discrimination in Employment Act (ADEA) adds another layer of complexity. This federal law specifically protects employees aged 40 and older. According to the ADEA, these employees are entitled to a 21-day review period to consider the terms of a severance agreement before they are required to sign. Additionally, after signing, they have 7 days to rescind their agreement. Failure to provide this time frame can invalidate the agreement.

Special Considerations for Group Layoffs and State-Specific Requirements

In situations involving group layoffs, employers must adhere to even stricter regulations. The federal Worker Adjustment and Retraining Notification (WARN) Act mandates that employers provide a 60-day notice for layoffs affecting 100 or more employees. Furthermore, for employees 40 and older, a 45-day review period is required before they have to sign a severance agreement. However, many states have enacted their own WARN laws, often with more stringent requirements and lower thresholds. For instance, some states may require notice for layoffs affecting as few as 50 employees. Additionally, local labor laws may impose further restrictions or requirements, such as presenting agreements in the employee’s primary language or mandating specific disclosures about unemployment benefits. Importantly, these state and local laws may apply even when federal WARN requirements are not triggered. 

Potential Legal Risks of Immediate Signing

Requiring an employee to sign a severance agreement on their termination day can lead to a variety of legal challenges:

  1. Legal Challenges: Agreements may be challenged in court if signed under duress or without adhering to mandated review periods. This can result in costly litigation and reputational damage for the employer.
  2. Claims of Coercion: Employees may claim they felt pressured to sign the agreement, particularly if it was presented in a high-stress context. Such claims can undermine the enforceability of the agreement and lead to protracted disputes.
  3. Violations of Labor Laws: Non-compliance with federal laws, including the ADEA and WARN Act, can result in severe penalties. Employers may face fines, and worse, lawsuits from employees claiming their rights were violated.
  4. Loss of Trust: For companies that pride themselves on fostering a positive workplace culture, requiring immediate signing can damage employee trust and morale. This may have long-term implications for employee retention and company reputation.

Best Practices for Employers

To mitigate risks and ensure compliance when handling severance agreements, employers should consider the following best practices:

  1. Provide Adequate Review Time: Allow all employees, sufficient time to review the severance agreement. For employees aged 40 and older it is important to comply with the ADEA-mandated review periods— at least 21 days for individual separations, or 45 days for group layoffs. While not typically required for employees under the age of 40, extending a few days for a review period to all staff can be considered a best practice. This demonstrates respect for their rights and reduces the likelihood of coercion claims.
  2. Communicate Clearly: During the termination process, communicate the details of the severance package transparently. This can include conducting exit interviews where the employee can ask questions about the terms.
  3. Document the Process: Keep thorough records of the termination process, including any communications related to the severance agreement. This documentation can be invaluable in defending against potential legal challenges.
  4. Seek Legal Counsel: Before implementing any severance agreement policies, consult with legal professionals to ensure that all agreements comply with both federal and state regulations. Legal advice can help identify potential risks before they escalate into legal issues.
  5. Educate Management: Ensure managers and HR personnel are trained on the legal implications of severance agreements. Understanding the requirements and potential risks can help them navigate these situations more effectively.
  6. Consider Alternative Approaches: Instead of immediate signing, consider offering a separate meeting or a cooling-off period before the employee signs the severance agreement. This not only alleviates pressure but also fosters a sense of fairness in the process.

Contact Us for a Free Strategy Session

While it may be technically feasible to require an employee to sign a severance agreement on the day of termination, doing so exposes employers to substantial legal risks. Navigating the complexities of federal and state regulations, particularly concerning older employees and group layoffs, is essential for minimizing potential legal exposure.

For employers seeking to implement sound severance practices, understanding the legal landscape and adhering to best practices can make a significant difference. If you find yourself facing termination issues or require assistance in drafting compliant severance agreements, reach out to InPrime Legal. Our experienced team is equipped to help you navigate these complex legal matters and ensure your business remains protected. Contact us today for a consultation!