What is a Severance Agreement?
On its surface, a severance agreement is a deal between an employer and worker when the worker is asked to leave employment. In exchange for certain protections, a worker signs away certain rights to sue a company on claims that arise before the execution of the agreement. The basic purpose of a severance agreement is for the company to limit its liability and make the separation as amicable as possible . A severance agreement usually includes a separation date, a release of claims, as well as non-disparagement and confidentiality clauses. Sometimes a company might give an employee a severance package – in addition to the usual paycheck (or financial consideration), a retired employee also might receive some payment or health benefits that continue for some period. Unlike the law in the UK, there are not statutory entitlements to particular severance packages in the United States.
Why Age 40 Matters to Severance Agreements
Employers should particularly worry about the interpretation of severance agreements in cases of employees that are over 40 years old, as such cases are generally protected by the Age Discrimination in Employment Act ("ADEA"). The law requires that, if an employee is covered by the ADEA, any "waiver" should be "knowing and voluntary," in writing, and informed consent of the employee must be obtained before the waiver is effective. An employee is protected by the ADEA if he or she is over 40 years old.
Accordingly, an employer cannot ask an employee to sign a severance agreement that will waive claims under ADEA without giving the employee at least 21 days to consider whether he or she wants to sign the agreement. In addition, where an employer asks more than one employee to sign a severance agreement, it must give the employees at least 45 days to consider whether they will sign the agreement. During these time periods, the employee may revoke his or her waiver in writing. Some employers take this revocation provision seriously and will allow a terminated employee to reconsider and withdraw from the agreement during the 7 days following the employee’s signing of the severance agreement. Others will allow employees to sign the agreement, have it notarized, and then keep it in a drawer until the 7-day period expires. Either approach is acceptable, but what is particularly unacceptable is keeping the severance agreement and acknowledging that the employee had the opportunity to consider the agreement, without letting the employee actually have such opportunity.
What is the 21 Day Consideration Period?
Another requirement is for the employer to give the employee at least 21 days to consider whether the employee wishes to sign the release. That is, the release should say that the employee has 21 days to consider the release and decide whether to sign it. Usually the timing of when the 21-day period begins is up to the employer and the employee. Best practice, however, is for the employer to give an employee consideration of the release before being terminated. A much better "best practice" however, is giving an employee consideration of the release prior to being terminated. If this is given in advance, then an employer will likely know whether the employee needs more time to think about it; otherwise, the 21-day clock does not start to run until the employee receives the Release.
The purpose of giving an employee 21 days" consideration period is that it gives the individual time to reflect on the decision. It also helps to ensure that any decision made is fully informed. Also, there is no negotiating down this period and indeed, if, after the 21-day consideration period, the employee drags it feet, the employer can rescind the offer and terminate the employee without the individual having to worry about bringing a claim for age discrimination.
The 21-day consideration period is essentially a safeguard and protection for an employee over age 40 that is reviewing a severance agreement.
The Revocation Period: What You Should Know
Beyond the information requirements on the cover page, an additional layer of protection comes into focus for employers offering severance agreements to employees 40 years or older. Under the OWBPA, if the employee is provided with a waiver of rights under the ADEA or a release of ADEA claims, the employee may not waive his or rights until a period of 21 days has passed from the time the employee was presented with the severance agreement (or, if the waiver or release that the employee is being asked to sign is in addition to a termination of employment, until a period of 21 days has passed from the time the employee was both presented with the severance agreement and notified of the opportunity to consider it) .
Additionally, even when an employee covered by the OWBPA gives an otherwise valid waiver, he or she later has the right to revoke the agreement for a period of 7 days after signing. If the employee revokes his or her acceptance within these 7 days, the waiver is automatically void.
Legal Requirements and Employee Rights
Employers Obligations to Legal Compliance and Employee Rights
Companies that offer severance agreements to employees over 40 have obligations to ensure those agreements comply with OWBPA. Most importantly:
• The employee must be given 21 days in which to consider the proposed agreement. In other words, the company cannot attempt to rush the employee into signing the agreement without allowing the employee 21 days to consider it. The 21 days generally do not begin until the employee is told that his or her position is being eliminated and/or their job title will be/has been eliminated or has been replaced with another job title.
• Only if the company needs to close a facility, or discontinue a line of business, can the company reduce the 21 day consideration period to 14 days.
• However, even 14 days is not enough time for many employees to understand a severance agreement and muster the courage to contact an attorney to review the agreement (and sometimes negotiate some terms/elements of the agreement).
• An employee may revoke his or her acceptance of the agreement within 7 days after he/she signs it. For this reason, the 7 day revocation period must be referenced in the agreement and the 7 days cannot run until the last day of the 7 days.
• If the severance agreement provides severance pay and benefits to 10 or more employees, the company must provide a complete copy to all 10/greater employees. Each employee is then permitted 45 days to consider it and then 7 days after that to revoke it.
• Employees have the right to include their age in any lawsuit filed after accepting a severance agreement, regardless of how many times the severance agreement states otherwise.
• Employees have the right to request the job titles and ages of all employees (not just those who terminated) who were considered for lay offs during the restructuring that gave rise to the severance agreement. Note: A common negotiation point is the number of employees for which the discharged employee must ask for this information.
Things to Consider When Evaluating a Severance Agreement
Today, employers will already have prepared the Severance Agreement and General Release for employees over 40 years old. In reviewing the Severance Agreement, these form agreements include a provision where the employer tells the employee about their rights under the law. For example, in one of my clients’ severance agreements given May 15, 2015, the employer stated: If you are over age forty (40) and this Agreement is executed by you, you are entitled to revoke your acceptance of this Agreement within seven (7) days after you sign it, by submitting a Revocation/Withdrawal Form to the Company in accordance with the instructions provided with this Agreement. This means that you may resign from the Agreement for any reason or no reason during the revocation period. It is important to receive a Severance Agreement that complies with the OWBPA compliance providing a seven day right to revoke a signed severance agreement. If the seven day right to revoke is not included in the severance agreement, then the agreement is no good and the employee has a chance to sue for attorneys’ fees. The Second Circuit Court of Appeals recently found in Raniola v. Bratton, 243 F.3d 610 (2d Cir. 2001) that: In our view, were the OWBPA criteria merely a checklist requiring that an employer inform an employee about his or her right to seven days in which to reconsider a release , a second problem of drafting compliance would be presented. The statute might authorize courts to override an employee’s otherwise effective waiver of his or her rights solely on the basis of a technical omission by the employer in a group-termination context. Fortunately, the OWBPA also spells out the substantive content required in an effective waiver of rights in that context, see 29 U.S.C. § 626(f)(1), and we believe it expressly requires that employers inform their employees of their right to seven days in which to consider the terms of any waiver of rights. Therefore, before signing a severance agreement, it is important to understand the rights and obligations of the parties. An employee over 40 years old who is offered a severance agreement by an employer should consult an employment lawyer immediately. The former employee cannot wait too long because the provisions in the agreement must be signed within the stipulated time. Employers are given a seven day right to revoke the general release with the understanding that employees over 40 years of age have seven days to revoke their rights to the general release. Employers again are bound by the OWBPA and if an employer provides an over 40 year old employee with a general release which does not provide seven days to revoke rights then the general release will be deemed null and void. It’s important to understand the provisions of the severance agreement before it is signed, since nothing can be done after the 21 day period to alleviate any draconian provisions in the termination agreement.