Severance Agreements: Tips for Ensuring They Are Enforceable
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Severance agreements are common contracts that are entered into between an employer and a departing employee in which the employee receives extra compensation while the employer receives piece of mind from a non-compete, release of potential claims, or other protections that may be negotiated. However, there are restrictions on severance agreements which businesses should be aware of, to avoid their severance agreements being rendered unenforceable. Accordingly, businesses should consider the following to ensure their severance agreements are enforceable.
Adequate “New” Consideration
It is common for severance agreements to have language releasing the employer from “all claims,” or some form of a general release. General releases are a staple of accepted common litigation practice and encompass known and known claims. Carey-All Transport, Inc. v. Newby, 989 So. 2d 1201 (Fla. 2d DCA 2008). Thus, courts typically find severance agreements, even those with general releases, enforceable when there is a valid offer, acceptance, and sufficient consideration. It is important to note, though, that this consideration must be separate to something the departing employee was already entitled to. For example, promising to pay an employee for work already done or benefits already earned is not sufficient consideration, and the release will not be enforceable.
Willful and Knowing Acceptance
For the acceptance to be valid, the employee must “willfully and knowingly” waive his rights. Courts use a totality of the circumstances test to determine if the agreement was willfully and knowingly agreed to, such as:
- the education and business experience of the employee;
- the time the employee spent considering the agreement before signing it;
- the clarity of the language in the agreement;
- the employee’s opportunity to consult with an attorney;
- whether the employer encouraged or discouraged consultation with an attorney; and
- the consideration given in exchange for the release compared to the benefits the employee was already entitled to receive.
For example, in Paylor the plaintiff was an employee for an insurance company who signed a severance agreement for 13 weeks of severance benefits in exchange for signing an agreement which waived any claims that would be under the Family Medical Leave Act (“FMLA”). The employee who signed the severance agreement subsequently joined two other named plaintiffs in filing a complaint against the company for violations of the FMLA. The 11th Circuit Court of Appeals, looking at the six factors above, affirmed the trial court and held the severance agreement was enforceable because it was knowingly signed and the signee received adequate compensation. On the other hand, a severance agreement can be unenforceable if the employee is only given a 24 hour window to sign. Puentes v. United Parcel Service, 86 F.3d 196 (11th Cir. 1996).
Cannot waive Unemployment benefits
While general releases are enforceable, certain employee rights cannot be waived, even if the employee knowingly and willingly signed the waiver and received valid consideration. For instance, in Florida it is unlawful for an employer to require an employee to waive the employee’s rights in a severance agreement to receive Unemployment benefits. An employer who violates this statute commits a misdemeanor in the second degree. See Fla. Stat. §443.041(1).
Overtime and Minimum Wage Violations
Furthermore, severance agreements generally cannot waive claims for unpaid overtime and/or minimum wage violations pursuant to the Fair Labor Standards Act. Moreno v. Regions Bank, 729 F. Supp. 2d 1346 (M.D. Fla. 2010). But, these waivers can be valid if the settlement negotiations are:
- supervised by the Secretary of Labor pursuant to 29 U.S.C. §216(c);
- a court reviewed and approved the settlement in a private action for back wages under 29 U.S.C. §216(b); or
- the plaintiff is offered full compensation on the FLSA claims. “Full compensation” is the employer being unconditionally obligated to pay the amount owed.
Cannot Impede Governmental Action
Finally, the severance agreement cannot have provisions which prevent or restrict cooperation with a governmental agency, such as the EEOC. For example, severance agreements which prohibit an employee filing a charge, helping someone file a charge, or otherwise cooperate with a governmental agency will not be enforced. EEOC v. Cosmair, Inc, L’Oreal Hair Care Div., 821 F.2d 1085 (1987).
In conclusion, while there are other issues to consider when drafting or offering a severance agreement, a business should be aware of the issues discussed above and ensure that it complies. If businesses consider these factors while designing their severance agreements, they will have put themselves in a great position in the event the employee’s waiver needs to be enforced.