The Dirty Details on Severance Agreements

This former employee hopefully had a severance agreement

“I’ve been told that if I can get an employee to sign a severance agreement, they won’t be able to claim unemployment. Is this true?”

The short answer to this question is no. Just like in the case of “pay in lieu of notice,” a severance agreement does not eliminate an employer’s obligation to pay unemployment.

Let’s back up a bit. We often see the term pay in lieu of notice confused with the concept of severance pay at the time of termination. However, pay in lieu of notice typically happens one of two ways:

  1. You decide to let someone go and pay him/her an amount, often one to two weeks of pay, in order to lessen the blow or as a goodwill gesture.
  2. The other is when an employee turns in his/her notice and, rather than letting him/her finish out the rest of the week, you decide to pay for X amount of time and let him/her go that day.

Severance pay, on the other hand, must be attached to a severance agreement. That is to say that, in return for some amount of money, benefits, or other consideration, the employee releases you of all legal claims which can be covered under a severance agreement. There are other HR reasons for securing a severance agreement, but let’s keep it simple for now.

Both pay in lieu of notice and compensation from a severance agreement can be reported to the state and will typically offset the start of and total amount of benefits that an employee may be eligible to claim. However, under federal law, the employee cannot agree to relinquish his/her rights even if he/she wishes to, including his/her rights to unemployment benefits.

A good way to think of it is this: under a severance agreement, the employee isn’t giving up the right to sue, but rather is affirming that his/her claim, if any, has been satisfied and that he/she will not pursue it further. That means that a severance agreement will typically only delay the start of unemployment benefits, not render the employee unable to make a claim. Also, In order for a severance agreement to be valid, you must inform the employee of his/her rights under the agreement and that it should be reviewed by an attorney.

Since the severance agreement cannot stop an employee from making a claim, but will typically only delay the start of unemployment benefits, the questions you need to ask yourself are: Are severance agreements a path that you want to go down? Getting lawyers involved often escalates an issue that otherwise might have just dissipated as water under the bridge. Will your severance agreement be a sign that something is wrong, thus triggering a negotiation when all you wanted was to get someone out of your office?

You might also want to consider that if the agreement is not properly executed/ written or is later invalidated, many courts have found that the employee is not required to give the severance money back and indeed has the option of ignoring the agreement.

If the employee is over forty years old, there are additional processes that must be followed to make the release valid, and which give the employee the right to rescind the agreement and return the money as if it never happened in some circumstances.

The primary benefit of a severance agreement is that it releases you of all legal claims. But, again, employees cannot waive all their rights under the agreement.  For these reasons, we rarely advise severance agreements to our members. We have, on occasion, advised that a member seek additional guidance from a local attorney, and then decide if a severance may be the best way of handling a messy situation.

As always, if you have a question about what I’ve discussed, or if I’ve raised a concern for something happening in your practice, call us at 866-414-6056. If we can, we will help you at no charge.

Friendly Disclaimer: This information is general in nature. Not intended to replace good counsel about a specific issue with either your attorney or your favorite HR expert. 

May 23, 2013

Friendly Disclaimer: This information is general in nature and is not intended to provide legal advice or replace individual guidance about a specific issue with an attorney or HR expert. The information on this page is general human resources guidance that is believed to be current as of the date of publication. Note that CEDR is not a law firm, and as the law is always changing, you should consult with a qualified attorney or HR expert who is familiar with all of the facts of your situation before making a decision about any human resources or employment law matter.
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