Employment

How Severance Agreements Protect and Help Employers

A severance agreement is essentially a contract between an employer and an employee that outlines the terms and responsibilities for both parties, as well as the potential compensation package that would come into play if an employee loses their job through a layoff or other situation. Typically, severance agreements cover wages, COBRA insurance extended coverage, unemployment benefits and, depending on the company, transition assistance for an employee to find a new job.

Though generally viewed as beneficial to employees, severance agreements are also helpful for employers in multiple ways – read on to see how severance agreements can actually protect and help employers.

Severance Agreements: Advantages for Employers

In Colorado, severance agreements and compensation are not required or prohibited, but there are several advantages for employers. The most obvious benefit of a severance agreement is reduced liability and the decreased chance of an employee filing a wrongful termination suit. Additionally, severance agreements can help prevent terminated employees from unfairly disparaging a company’s reputation. Other benefits include:

Protection of confidential information (in compliance with Colorado’s new non-compete statutes)
Smoother transition period
Goodwill between employer and employees
Clarity of expectations for both parties
Mitigation of misunderstandings and disputes

Key Considerations

Severance agreements and policies can be handled individually or through a blanket policy, depending on the level of employee and degree of protection a company needs. For example, lower level employees, who don’t have access to confidential information, trade secrets or intellectual property, may be fully covered by a severance policy included in an employee handbook. Higher-level employees with more restricted access to confidential information are better served with an individual severance agreement. Regardless, there are several important factors to consider.

Legal Compliance

Make sure the agreement is compliant with local, state and federal laws. Colorado House Bill 22-1317 became law in August 2022, and introduced more stringent restrictions on non-compete and non-solicitation covenants. Specifically, Colorado now prohibits the use of non-compete and non-solicit agreements except in the sale of business context and with “highly-compensated” workers (employees earning more than $112,500 annually in 2023). For a severance agreement to be legally valid, employers must be compliant with the new non-compete statute and use extremely clear language.

Negotiation and Review

Give employees reasonable time to consider the agreement, and for negotiations to take place if necessary.

Under the Worker Adjustment and Retraining Notification Act (WARN), employers with 100 or more employees are required to provide employees notice of a layoff 60 days prior to termination. Additionally, the Older Workers Benefits Protection Act (OWBPA) mandates that employers provide workers over 40 years old a minimum of 21 days to review a severance agreement, and an additional seven days post-signing to revoke it.

Employees need to identify compelling reasons for negotiation, so use precise, clear language to avoid any possibilities of discrimination, unpaid wages, or harassment claims.

Waiver of rights and future claims

Be very careful with language around waiving rights and future claims. According to the U.S. Equal Employment Opportunity Commission (EEOC), an employer cannot ask an employee to waive the right to file a charge with the EEOC, or to waive the right to testify, assist or participate in any hearing or other EEOC proceeding involving an federal employment discrimination law.

Additionally, employers cannot ask employees to waive rights to future claims that might arise after the agreement’s execution. Thus, timing is important when it comes to signing the agreement. If an employer is in a rush to get the agreement signed before the employee’s last day of work, the company is then open to litigation if something goes wrong between the signing of the agreement and the employee’s last day.

What to Include

The more precise and comprehensive the agreement, the better protection for both the employee and the employer. Below are a few of the most common components of severance agreements:

Reason for separation: List why the employee is being fired or asked to resign, with the intent of finding a satisfying agreement to settle any differences.

Employment timeline: List the hire and termination dates, and timeline for reviewing and signing the agreement.
Compensation: Outline the severance pay package, if being offered, including any compensation for unused paid leave.
Insurance: Employees are legally entitled to medical benefits for up to 1.5 years after termination through the COBRA act. Employers also have the option of extending benefits for a set amount of time.
Stock options: If stock options are a benefit, include the process for employee cashout or transfer.
Liability Release: Include language for a general liability waiver, where the employee agrees not to make or pursue any legal claims against the company. This not only protects the employer, but also other employees, shareholders, directors, subsidiaries and other affiliated companies.
Transition assistance: If offering job transition assistance, include those details, exceptions and limitations.
Return of company equipment: Outline how company equipment such as laptops, cars, cellphones, etc. will be handed over to the company, with a timeline.
Future reference checks: Some employers agree to give positive references or provide a reference letter to assist with finding their next position. Specify your company’s policy and intentions.
ADEA information: Agreements for employees over age 40 must include reference to the Age Discrimination Employment Act and inform them of their legal rights.
Confidentiality & non-compete details: Restrictive covenants in this category must comply with Colorado’s latest non-compete and non-solicitation statutes.
Non-disparagement clause: Explain that the employee cannot spread negative information about the company for a specified amount of time.

Seek expert advice

A good severance agreement benefits both the employee and employer, generates goodwill, and makes the transition process smoother all around. An inadequate agreement, or one that attempts to push unlawful restrictive covenants opens up employers to potential litigation.

Don’t take the risk. Have an experienced employment attorney review and assist you in drawing up severance agreements so that they comply with local, state and federal laws and provide the adequate level of protection for your company.