7 Things You Didn’t Know Were Hidden in Your Severance Agreement

A terminated employee is a vulnerable one. Unfortunately, there are companies who take advantage of this compromised status. When receiving a paid severance package depends on signing a severance agreement, many employees may rush to sign the document without giving it a thorough review. Severance agreements may expose the former employee to civil liability or eliminate needed benefits. Here are 7 hidden terms that may place terminated employees at a significant disadvantage.

1. Elimination of Unemployment Benefits

The severance agreement may state directly, “Employee agrees not to pursue unemployment compensation.” Even with a generous severance package, there is always a possibility employment compensation also becomes necessary.

While a company cannot require an employee not to apply for employment benefits, these provisions work their way into agreements frequently nonetheless. The parties can state their intentions – that they plan to apply or not apply, or that the company will not contest – but private agreements on eligibility for benefits that are approved and paid by the government alone are not lawful.   If the company or the employee wants to include a “statement of intention” for the sake of providing reassurances, those are permissible, and if anything, an employee should simply make clear during the negotiation that they intend to apply for unemployment benefits and assume the company will not oppose.

Negotiating unemployment benefits is not permitted, but reaching an understanding of what the parties intend to do without any quid pro quo gives the parties ease in finalizing settlements.  Finally, employees should make sure they disclose the severance payments, and possibly the agreements, when they are required to do so, and also speak with an accountant or a tax lawyer about the implications of both the proposed severance payments and the unemployment benefits payments.

2. General Release of All Claims

The general release of all claims contains material to the effect of, “Employee agrees to release any and all claims against Employer.” This may appear to be a harmless, reasonable contract term. But it may have serious consequences.

“Any and all claims” means exactly that – all claims. If an employee suffered physical or mental injury from their formal workplace, this eliminates their right to pursue worker’s compensation or file a harassment claim. The same is true if an employee realizes that their former workplace never followed through on a disability accommodation or discriminated against them on the basis of race, gender, religion or sexual orientation.

3. Non-Disparagement Clauses

Non-disparagement clauses restrict the employee from speaking poorly about their former employer after termination. The problem is “disparagement” is a subjective term.

For example, describing a work culture as corrupt or abusive may be considered disparagement, especially if an employee does this publicly in a blog article or on social media. However, a simple statement of, “If I had it to do all over again, I would not apply to work at ____.” may also be considered disparagement.

Ensure that the non-disparagement clause is not one-sided. If the employee cannot criticize the company, the company should offer the former employee the same courtesy.

4. Refusing References

If an employee is terminated due to a downsizing effort, the least a former employer can do is offer a reference, especially if the employee performed well. However, many severance agreements may refuse this courtesy.

In a world where references and networking is crucial, a provision refusing to provide this feedback can delay future employment. When an employee is terminated for reasons other than performance, refusing references isn’t necessary or in the employee’s best interest.

5. Cooperation Clause

This class of terms maintains the employee’s obligations to the former employer. For example, an employee may be required to notify their former employer if they receive a summons as a witness to a discrimination claim or an administrative complaint from an agency.

Cooperating with a government investigation or testifying in favor of a former co-worker’s discrimination claim, for example, may often be in a former employee’s best interest. In these cases, letting their former employer into the loop may be uncomfortable or even intimidating. There are some cases where a former employee is better off cutting off all connections with their once-employer and they should have that option when these instances arise.

6. A Gap in Benefits

Employers ideally should bridge the gap and allow an option to continue benefits, especially health insurance.

Terms that immediately terminate benefits are troublesome but sometimes, this is subtler. A severance agreement may lack any terms that address the continuation of benefits. This is not worth the risk and employees should carefully consider signing an agreement that does not give them an option for bridging the gap.

7. Waiver of Debts

An employer may owe debts to an employee. These can include unused personal time off, expenses that have not been reimbursed, and even commissions and overtime wages that remain unpaid. There may be a term that accepting the severance package offsets these owed expenses.

However, this is not acceptable in most states. Overtime wages, expense reimbursement, and even paid time off are owed to employees outside their severance packages. These are separate and are owed even if an employee is terminated. If there is a severance agreement, it should include an accounting of unpaid debts owed to the employee and the amount agreed to at the time of separation.

When to Contact an Employment Law Attorney

When facing employment termination, it’s easy to sign a severance agreement without review just to put an end to things. However, it’s important to review any severance agreement carefully for terms that may not be in your best interest. Always consult with a qualified employment law attorney before signing. All employees have the right to review the agreement, ascertain whether it truly works for their interests, and submit an alternative proposal.


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