Top 10 Legal Issues Facing Entrepreneurs in Pennsylvania

Topic 6: Severance Agreements

As set forth in the above topic, most states, including Pennsylvania, are employment-at-will states. (See Topic 4). In an at-will state, employees may discharge employees “at any time, for any reason, or for no reason at all.”¹ Despite the at-will employment status of most employees, there are numerous reasons for employers to offer severance packages to terminated employees. First, there is the potential for litigation as a result of the circumstances surrounding the termination. (See Topic 4). An employer may believe there was risk associated with the termination. The employer, under these circumstances, may feel that the best protection against a potential lawsuit is to have the employee execute a release.² Second, the employee may be in a legally protected class based upon his age, sex, disability, religion, race, national origin, etc.³ Third, the employee may have an employment contract. Under this scenario, the employee may have been terminated “for cause” under the terms of the employment contract, and the employer is concerned that a breach of contract claim may be pursued by the terminated employee.

In exchange for the severance consideration, the employer must ensure that the employee signs a release. Further, with an underlying employment contract, the employer would ensure that the severance agreement and release contain non-compete, non-solicitation, and confidentially sections. (See Topic 5). Typically, these sections are modified in the severance agreement based upon the circumstances surrounding the termination, the threat that the terminated employee poses to the company, and the degree of legal risk associated with the termination. Since employees with employment contracts are usually middle management or senior management, the severance agreement is usually subject to negotiation.

In our experience, we have never drafted a severance agreement without a release. The release is the most important provision in a severance agreement. In order for the release to be valid and legally enforceable, the release must be clear so that the decision to sign the release is done in a knowing and voluntary manner, without any coercion, fraud or duress. The release must clearly indicate that the employee is giving up his or her right to sue for any and all claims he or she may have against the company. ⁴ The severance consideration may take the form of severance pay and continued health benefits. The following is a good example of a general release of claims clause contained within a severance agreement:

“In consideration of the payments and benefits provided to you under this Agreement, you hereby agree on behalf of yourself, your heirs, administrators, executors and assigns, to release and forever discharge the Company, its affiliates, predecessors, officers, directors, employees, trustees, agents, attorneys, employee benefit plans and their fiduciaries, and each of their successors and assigns, from any and all suits, claims, demands, and causes of action of any nature or kind whatsoever, which you now have or ever had, up to the date of this Agreement, against any of them. This release includes, without limitation, any claims under federal, state, or local laws, regulations, executive orders, common law, or other source concerning civil rights, employment discrimination, employee benefits, wrongful discharge, beach of express or implied contract, defamation, attorneys’ fees, or any claims which may have arisen in connection with your employment with the Company or the cessation thereof. Without limiting the foregoing, this release includes any claims you may have up to the date of this Agreement pursuant to the federal Age Discrimination in Employment Act, 29 U.S.C. §§621 et seq.”

In the event the terminated employee is 40 years of age or older, counsel must review the severance agreement and release to ensure that the Company is in full compliance with the Age Discrimination in Employment Act (ADEA).⁵ (See Topic 8). In order for a release to be valid under the ADEA, the waiver must be knowing and voluntary. The ADEA sets forth the standards in determining whether the release is knowing and voluntary including:

• The release must be written clearly so the average individual eligible to participate can understand it;
• The release must point out that the rights being waived are rights arising under the ADEA;
• The release does not waive a person’s rights or claims arising after the execution of the release;
• Consideration must be given in exchange for the release;
• The employer must advise the employees in writing that they should consult with an attorney before signing the release;
• The employer must give the employee at least twenty-one (21) days to sign the release unless the release is requested as part of an exit incentive or other termination program, in which case the employees are entitled to review the release for forty-five (45) days before signing; and
• The release is revocable for seven days after execution.

Conclusion
As long a business employer is aware of the limitations as well as the benefits, a severance agreement can be an invaluable, expeditious and cost effective tool in bringing closure and finality to the termination of business relationships. Keeping the above in mind and consulting with a knowledgeable attorney in this area of the law, can bring much needed assurances and stability to your decisions in terminating employment, and often allows both parties to walk away from the business relationship happier.

¹ Darlington v. Several Electric, 350 Pa Super. 183, 189, 504 A. 2d 306, 309 (1986).

² Special Study for Corporate Counsel on Severance Agreements, SEVAGR §1:4 (2007).

³ Id.

⁴ Id.

⁵ 29 U.S.C. §§621 et. seq.

Topic 7: Employees vs. Independent Contractors ›