Why Should Clients Have Severance Agreements Reviewed?

A sad, but current, reality is the “downsizing,” “right-sizing” and closure of businesses due to the severe economic downturn we are facing.

I have had the unfortunate occasion to review a number of severance agreements for clients during the past several months.  In doing so, a number of relevant factors have come to my attention about these agreements.

Most severance agreements recommend that the employee have the agreement reviewed by counsel.  This is not (generally) being done by some egalitarian sense of concern for the employee’s welfare.  Under the Age Discrimination and Employment Act (ADEA), it is actually a requirement that they make that recommendation for employees over age 40.

Another reason is that it is more difficult for the employee to later argue that they did not understand the contract, if they have had it reviewed by counsel.  I still believe review by an attorney is worthwhile.

Severance Agreements are not usually required because most employees are employed “at will” in Michigan.  Nonetheless, employers are offering them in part, perhaps to assist the severed employee in a difficult time of transition.

A primary purpose of severance agreements is to induce the departing employee to waive any possible present and future claims they may have against the employer, including claims they may not even know exist.

Severance agreements typically exchange some form of extended pay or benefits, in return for the waiver.  When the employer is a very large corporation, the likelihood that the client will have any bargaining ability to negotiate the agreement is small.  So it is important to explore whether, and to what extent they may be giving up something of real value, to determine whether to sign the agreement at all.

It is also important that the agreement address benefits.  There is some “grey” area regarding if, and what benefits may be waived under the federal ERISA statute.  There may also be instances in which the waiver of claims should be mutual, i.e., the employer should waive any rights against the employee, under the same theory as the employee is waiving claims.

If you have clients, or know people going through this difficult time, who have severance agreements, encourage them to take some time to have these carefully reviewed.

This Newsletter is intended to be informational only, and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards