Termination Tango: A Guide to Employment Separation Agreements and Severance Pay

Navigating the complexities of employment termination is no easy task, with significant implications for the parties involved. That’s where severance and separation agreements come into play, providing a vital framework for parting ways with wisdom. Whether you are an employer or an employee, seeking guidance from an experienced attorney is paramount to protecting your rights and interests.

What is the Difference Between Being Fired and Laid Off?

When an employer terminates someone due to poor performance, violating a company policy or for other individual reasons, it is a firing. When someone is let go because the company’s overall needs have changed, it is a layoff. Firings usually happen to individual employees, while layoffs can involve many employee terminations at the same time.

In the United States, most jobs are considered “at-will.” At-will employment means that an employee or employer may terminate employment at any time, without notice or cause, as long as it is not due to discrimination or retaliation for protected conduct. Unless a person is employed under an employment agreement or a union contract that stipulates otherwise, the employee is likely working at-will.

Terminated employees may have rights to certain benefits, such as continued health insurance coverage and unemployment compensation. In some cases, there is no significant difference in how employees are treated in a firing versus a layoff. However, if an employee is fired for personal conduct, the employer may have the right to challenge the employee’s request for benefits. This includes unemployment benefits, which are available only to those who are unemployed through no fault of their own.

Is There a Difference Between Separation and Severance Pay?

Many employers offer an agreement to terminated employees, called a separation or a severance agreement. These are legally interchangeable terms. In such agreements, the employee is offered a payment in return for a promise to act or not act in a certain way post-employment. Often, these agreements insulate the employer from claims the former employee may have against the employer related to the termination. These agreements can vary widely in what they offer and require and should, therefore, be carefully written and reviewed by experienced employment counsel.

Common provisions in separation agreements include:

• Release of Liability. One of the primary purposes of a separation agreement is to have the employee promise not to sue the company for wrongful termination or other claims that arise from the termination. Not all claims can be contractually released without other approval, including those under the Fair Labor Standards Act (“FLSA”).
• Severance or Separation Pay. The terms of payment can vary and may be expressed as a lump sum cash payment, as payments over time, or as a form of ownership interest. Severance payments will often be proportional to the period of employment. For instance, an employer may offer one to two weeks of salary per year that the employee worked for the company.
• Non-Compete and Non-Solicitation. Non-compete clauses require that a former employee refrain from working for a competitor or in the same industry for a period of time after termination. These clauses (with a few narrow exceptions) are unenforceable in some states, including California, and may soon be in New York. In many states, courts may refuse to enforce extreme or unreasonable limitations on work. Non-solicitation clauses prevent a terminated person from taking customers or other employees from the previous company to a different company, although these must operate under limited circumstances.
• Non-Disparagement and Non-disclosure. Sometimes employers want to control what the former employee can say about their company. Severance agreement terms may stop the employee from sharing harmful comments about the employer and confidential information. These provisions can be mutual, meaning that neither the employee nor employer can speak poorly about the other, privately, or publicly. There are usually exceptions to these requirements to allow the parties to cooperate with certain investigations or other legally mandated processes.

It is important to consider that severance agreements may now be implicated by a recent National Labor Relations Board (“NLRB”) decision. In McLaren and Macomb, 372 NLRB No. 58 (2023), the NLRB ruled that employers may not offer severance agreements requiring employees to broadly waive labor law rights under the National Labor Relations Act. Because of the evolving laws in this area, it is important to consult an attorney to determine if your severance agreement complies.

Are Companies Required to Pay Severance?

Employers are not required to pay severance unless it is agreed upon in an applicable agreement (e.g., an employment or union contract). These agreements often outline the terms of severance pay and may also involve considerations for bonuses or ownership interests upon termination. Calculating these payments may be complex, especially if the agreement allows the employer to withhold payments under certain circumstances, including when the employee is fired rather than laid off.

While an employer may not be obligated to pay severance for at-will employees, severance is separate from compensation for hours already worked. A former employee whose employer withholds previously earned compensation should seek legal assistance to recover what they are owed.

When To Contact an Attorney

Losing a job can be financially, mentally, and emotionally challenging. When faced with a separation agreement from your employer, it is vital to understand your rights and obligations. These agreements can substantially limit your right to make future claims, but signing them right away may be tempting. Before making any decisions, consult an experienced employment attorney who can help you understand the potential risks and benefits.

Terminating employees is a challenging and sometimes risky step for employers, and understanding your rights and obligations to employees is critical. Before taking action, employers should consult an experienced attorney to get guidance on the best practices for termination. Offering a severance payment may be beneficial or required in certain cases, and employers should be well-informed about when and how to propose such agreements.

Contact the team at Romano Law today for assistance with your employment law needs.

Contributions to this blog by Joseph Ford and Gabriella Epley.