In General - Severance Agreements
In the case of an employment severance agreement containing a release, there are express and implied legal obligations that must be met, and they include, at a minimum:
assurance of voluntariness,
a fair exchange of consideration, and
the absence of fraud or duress.
Through the severance negotiation process, the parties seek primarily to avoid litigation and create a mutual plan for the future. See Kirl v Zinner, 274 Mich 331, 334, 264 NW 391 (1936) (in case of release of tort claim, court declared that “the very essence of a release is to avoid litigation, even at the expense of strict right”).
While both parties are agreeing to walk away from a potential dispute, there is always a need to tailor a broadly drafted release so as to preserve rights associated with narrowly defined areas of potential litigation.
The objective is to execute a written, formal severance agreement stating that a bargain has been struck, covenants exchanged, and a “treaty” executed to govern the termination of the employment relationship. Stefanac v Cranbrook Educ Cmty, 435 Mich 155, 458 NW2d 56 (1990); Leahan v Stroh Brewery Co, 420 Mich 108, 359 NW2d 524 (1984).
Occasionally, a third party may have potential rights or claims against one or both of the principal parties. In such cases, mutual releases and covenants not to sue are primarily designed to carve out those areas of risk that are essentially outside the control of either of the principal parties to the negotiated settlement agreement.
However, some rights cannot be released, waived, or surrendered (e.g., worker’s compensation claims, which are statutorily protected from contractual release, MCL 418.815).
How to Assure Voluntariness and Avoid a Fraud or Duress Claim
- The employer is implicitly duty bound to reasonably ensure that the employee’s decision to enter into negotiations, accept the terms and conditions for severance, and execute the agreement is voluntary. See Stefanac; Leahan.
- Factors that have been recognized as strong indicators of an employee’s knowing and voluntary action:
- Adequacy of compensation for the release,
- the simplicity of the release’s language,
- notice of the rights being relinquished, and
- an opportunity for the employee to consult with an attorney or other representative. See, e.g., Collucci v Eklund, 240 Mich App 654, 613 NW2d 402 (2000).
- A reasonable time to study the language before execution,
- a reasonable amount of time to revoke the release agreement after executing it,
- a reasonable opportunity to negotiate with the employer regarding the release agreement, and
- disclosure of the legal effect of retaining and failing to tender back to the employer the compensation for the release.
Should the Employee Hire an Attorney?
- From the employer's perspective, the most effective way of confirming voluntariness is to grant the employee the opportunity to obtain representation in the negotiation and execution of the severance agreement. See Hungerman v McCord Gasket Corp, 189 Mich App 675, 473 NW2d 720 (1991); Davis v Bronson Methodist Hosp, 159 Mich App 251, 406 NW2d 201 (1986).
- Of course, depending on the situation, this may be very valuable from an employee's perspective as well.
What to Expect When an Attorney Acts as Negotiator?
- Face-to-face and telephone communications with the employer are usually undertaken by the representative, not the employee.
- This is actually helpful for the employer as well because this mitigates against employee claims of employer browbeating and arm-twisting in the negotiation process.
- Even if the employee’s representative is not involved in the initial stages of the negotiation, the representative should be involved in the review and modification of any proposed written severance agreement. See Hungerman.
- The employer should insist on written confirmation that the employee’s selected attorney or representative has reviewed the agreement and approved it.
Consideration
The settlement agreement should contain specific recitations of the dollar amount of the consideration and any items of value given by the employer in return for the release provisions.
The enforceability of the agreement and the releases contained in it depend on a fair exchange of consideration between the employer and the employee.
A generic exchange of consideration is not enough.
In the absence of specific recitations, the employer may be vulnerable to an attack on the basis that the employer gave no consideration for the release of claims or covenants not to sue. See Stefanac v Cranbrook Educ Cmty, 435 Mich 155, 458 NW2d 56 (1990); Hammond v United of Oakland, Inc, 193 Mich App 146, 483 NW2d 652 (1992).
But see Hull v Welex, Inc, No 02-7735, 2002 US Dist LEXIS 24772 (ED Pa Dec 30, 2002) (plaintiff could not establish any set of facts supporting claim that severance agreement was not binding; even though defendant did not strictly follow agreement to letter, it substantially fulfilled its two promises under agreement by providing plaintiff with 27 weeks of salary and health benefits).
How to Create A Mutually Beneficial Severance Agreement?
Cash-in-Hand
The parties should identify precisely what dollar amounts are owed to the employee for unexhausted benefits, retroactive pay, and contractually established severance benefits.
The employee may also be entitled to pro-rata reimbursements for items such as professional fees, membership dues, and special equipment or supplies.
The parties should develop a list of compensable items and reach a mutual agreement on the dollar value of each item.
However, to the extent that amounts paid to the employee were already owed, they will not be recognized as consideration, in whole or part, making release provisions enforceable.
The procedure for payout will be an essential aspect of the severance agreement.
Timing of the payments may prove a particularly ticklish matter.
There may be tax consequences based on the time of year the agreement is reached;
there may be a need to stretch payments out over a fixed period of time to allow the employee to accomplish certain personal and professional objectives; or
the employee may need as much cash as possible, as soon as possible.
The employer and employee should explore these timing issues and make decisions in the best interests of both.
Why more sophisticated payout plan?
In some cases, payments directly to vendors, professional associations, and other third parties may be more beneficial, both economically and pragmatically, for the employee and employer.
Likewise, the employer’s ability to allocate these payments to appropriate business expense categories will be enhanced if the payments are made directly to vendors or other third parties because the payments can then be clearly designated as business expenses.
After severance, the employee will want, and deserve, some verification that payments are being made as agreed.
Problems with subsequent interpretations of the language of a severance agreement that obligates the employer to make payments for posttermination benefits?
It is a mistake to use broad and general language (“[will] pay [a] salary … together with all insurance and other benefits provided to associates of the Firm”). See D’Avanzo v Wise & Marsac, PC, 223 Mich App 314, 316, 565 NW2d 915 (1997).
The employer is inviting a lawsuit because such language is ambiguous and requires supplemental factual development to determine the actual intent of the parties.
Specific and clear language describing exactly in what amount, for what purpose, to whom, and for what time period payments will be made for posttermination benefits is key in avoiding subsequent contract interpretation litigation.
EFFECT OF EMPLOYEE'S FUTURE EMPLOYABILITY
Employers should also assess the likelihood that the employee will be successful in obtaining alternate employment in a reasonably short period of time after termination. Generally, the more marketable the employee is after separation, the more likely the employer will be successful in negotiating a severance agreement.
Such an assessment may be undertaken informally—through phone calls and contacts with colleagues in the field who have the power to hire. These people should be queried regarding available positions and market trends. More formal assessments can be obtained through placement agencies that maintain ongoing occupational and geographic studies of the job market. Another approach might be to consult with governmental agencies, such as the Unemployment Insurance Agency, regarding trends within the state and within specific occupations.
Indemnity/Risk Allocation
The subject of an indemnity contract is usually an unknown or a contingent occurrence or event. Langley v Harris Corp, 413 Mich 592, 321 NW2d 662 (1982); Orton v Markward & Karafilis, Inc, 83 Mich App 548, 269 NW2d 219 (1978).
However, the enforceability of indemnity provisions in an employer-employee severance agreement is limited. An indemnification agreement against negligence is generally unenforceable in a contract where the party’s relationship is that of employer and employee. See Blazic v Ford Motor Co, 15 Mich App 377, 166 NW2d 636 (1968).
The employer may, however, face demands from the employee to assume the defense of an action brought against the employee for pre-termination conduct.
Since it is likely that the employer will eventually be brought into the action, it is probably in the employer’s best interests to have control over the litigation.
At a minimum, the severance agreement should provide that the employee give the employer notice of any such action and allow the employer to assume the defense at its option.
- Miscellaneous Components
The release should cover all employer affiliates, representatives, agents, officers, and employees, present and future.
Specific waivers of the employee’s rights to reinstatement and future employment should be included.
The agreement should also cover ancillary costs and expenses, including attorney fees and applicable administrative agency fees.
Finally, the employer should press for language that excludes from the reach of the release any employee misconduct that was intentional and hidden from the employer.
Preexisting agreements between employer and employee may have past, present, and future value to the employer. When drafting a severance agreement, the employer should give special attention to the affirmative and specific preservation of such rights. See, e.g., Carboline Co v Lebeck, 990 F Supp 762 (ED Mo 1997) (employer inadvertently waived preexisting noncompete agreement in severance agreement that superseded all preexisting agreements).
Saving Face Provision
It is sometimes advisable to include a provision in the severance agreement that specifically allows the employer, through carefully selected representatives, to address the remaining workforce and provide appropriate information about the severance of the employment relationship.
Employee face-saving often involves leaks to remaining employees of bits and pieces of information regarding the agreement.
The employer may find it necessary to communicate with the remaining employees about the severed relationship to ensure that morale is not adversely affected by the publication of incomplete information about the severance agreement.
Since consent is an absolute defense to a claim of defamation, Harrison v Arrow Metal Prods Corp, 20 Mich App 590, 615, 174 NW2d 875 (1969), the language authorizing such disclosure is an effective tool for refuting subsequent claims of employer defamation.
Property and Possession
During their tenure, employees often obtain possession and use of various items that must be returned to the employer, and employees bring personal items into the workplace that must be returned to them.
Both the employer and the employee should prepare comprehensive lists describing properties to which each claims a right of possession.
They should exchange these lists and use them as guidelines for locating and returning personal property.
The severance agreement should establish a procedure for property return and exchange.
It should establish when, where, and how the property will be returned or exchanged.
In some instances, mail exchange is more effective and less disruptive than face-to-face exchange.
In other instances, depending on the bulk and number of items to be exchanged, it may be necessary to make special arrangements for a moving or messenger service to act as the employer’s or employee’s agent in the return or exchange.
The employer should establish a specific time limit to complete the exchange of personal property.
After the time limit expires, there should be a waiver or loss of the right to claim possession of any properties not disposed of in accordance with the severance agreement.
Statutory Requirements Relating to Age Discrimination
Extra steps are required to protect against possible federal claims of age discrimination if an employer does not meet its obligations under the Older Workers Benefit Protection Act (OWBPA), Pub L 101-433, §1, 104 Stat 978 (1990), which is a series of amendments to the Age Discrimination in Employment Act of 1967 (ADEA). See 29 USC 621 et seq. Its provisions impose several technical requirements for the waiver of age discrimination claims:
The waiver must be part of an agreement between the employee and the employer, written in a manner that the employee or the average individual will understand.
The waiver must specifically refer to rights or claims arising under the ADEA.
The employee must not waive rights or claims that might arise after the waiver is executed.
The employee may waive rights or claims only in exchange for consideration that is in addition to anything of value to which the employee is already entitled.
The employee must be advised in writing to consult with an attorney before executing the agreement.
The employee must be given a period of at least 21 days within which to consider the agreement, or if a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees, the employee must be given a period of at least 45 days within which to consider the agreement. The statutory language, however, does not create an irrevocable 21-day employee offer or a 21-day option contract; the offer may be rejected or revoked during the 21-day period given to the employee for consideration of the agreement. See Ellison v Premier Salons Int’l, 164 F3d 1111 (8th Cir 1999).
The agreement must provide that for a period of at least 7 days following its execution, the employee may revoke the agreement, and the agreement may not become effective or enforceable until the revocation period has expired.
The employee recipient of money or other valuable consideration may enjoy a windfall if the employer fails to satisfy the ADEA release requirements.
There is no obligation to tender back the consideration given for a release as a precondition to an ADEA action when the requirements of 29 USC 626(f)(1)(A)–(G) have not been met. See Oubre v Entergy Operations, 522 US 422 (1998); Howlett v Holiday Inns, 120 F3d 598 (6th Cir 1997).
Current EEOC regulations state that under the OWBPA, employees cannot be required to tender back the consideration received under a waiver agreement before being permitted to challenge the waiver agreement in court. 29 CFR 1625.23.
Regarding other federal statutory prerequisites to the negotiation and execution of severance agreements in avoidance of possible federal claims of discrimination on the basis of race, sex, age or handicap.
see, for example, 29 USC 2005(d) (no waiver of rights under Employee Polygraph Protection Act of 1988 unless part of written settlement signed by parties);
42 USC 12212 (ADA; encourages settlement negotiations and alternative dispute resolution where appropriate and to extent allowed by law);
29 CFR 1601.20, .24(c) (negotiated settlements with EEOC of Title VII claims);
41 CFR 60-1.33 (Office of Federal Contract Compliance Programs; requires written agreement to settle material violation of equal opportunity clause;
agreement must provide for remedial actions necessary to correct violations and deficiencies (for example, back pay and retroactive seniority)).