Severance Agreements - An Understanding as to What They Are

Written by Galen T. Shimoda

You receive a severance agreement and you do not know what it is.  A severance agreement is a legal instrument that allows a company to ensure that an employee does not file a lawsuit against it for claims.  Such claims that you could be waiving by signing a severance include harassment, overtime, wages, discrimination, and/or wrongful termination.  Before signing a severance agreement, it is advisable to seek legal advice.

What I look for in a severance is whether there is a fair exchange in the waiving of rights against the compensation and benefits being offered.  The first step in looking at the fairness of an offered severance is to learn facts.  The questions asked could include how the employee is compensated, what facts led up to the severance, the fairness in termination, the probability of finding new employment, and most importantly (from my point of view), “if I brought a lawsuit for the employee, what would be the fair market value of the settlement, given the facts and legal theories.”  

There are times after a consultation that I learn that an employee has very strong claims and I must advise not to sign the severance.  For example, one client came to me with a severance that offered three months wages. After reviewing the severance, I found that the client had been misclassified as a salaried, exempt employee for the last three years.  Given the employee's salary, I opined that the employee had a possible claim for overtime and other wages worth well into the six figures.  After doing a thorough analysis, I was able to negotiate a severance (or settlement) well in excess of the three months originally offered.  In such a case, the initial severance offered was not commensurate with the claims that the employee possessed.  

Another reason to review a severance is to determine whether the non-monetary terms are fair.  For example, does the severance have a sufficient neutral reference that would protect an employee from a bad reference in the future.  There could also be an issue with possible unlawful terms in a severance such as a non-competition clause (that an employee will not engage in competition against the employer in the future).  All of these issues weigh in favor of seeking legal advice on a severance.  

Not every factual scenario will result in a finding that legal claims exist.  However, it is always better to be safe than sorry.  For employers, the use of a severance agreement to have an employee waive possible legal claims is an effective strategy.  Many times an employee is desperate to receive benefits and any wages, given that the employee is being terminated, and will often accept the severance “as is”.

If you have any issues with your classification at work, please contact our office.

The Shimoda Law Corp. legal articles should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of these articles are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.

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