Severance Agreements
Severance agreements typically include a number of provisions that set forth the terms of the employee’s departure. These may include a release of claims, a neutral reference, benefits continuation, non-disparagement clauses and transition services, among others. A release of claims is generally included if the severance agreement is signed upon termination of employment (as opposed to entering into an agreement with a current employee). A release of claims is typically mutual but the primary purpose is the release of employee claims, while the employer releases the employee from the duty to work after termination. If the release is mutual, both parties release claims against the other . Regardless, a valid release of claims requires consideration; employment laws prohibit employees from releasing certain claims such as workers compensation or discrimination based on certain protected categories.
Severance packages vary by company, level of employee, industry and a number of other factors. There is no legal requirement to offer severance unless the employer has a policy or practice of offering severance or the employer has an express contractual obligation to do so. In some industries and for certain levels of employees, severance is offered as a matter of course, but it may not be expected for low-level employees.
Legally Binding Nature of Severance Agreements
A severance agreement is typically meant to take effect when signed by both the company/employer and the employee/ex-employee (or current employee) at the time of the termination of employment. Because of its dual purpose – as a general release for the ex-employee and as an executive employment agreement – it is understood and expected in most cases that the severance agreement will only bind both parties when it is signed by both that the same terms, conditions and agreements form the basis of the legal terms and obligations of both.
Although in some cases the company/employer may seek to revoke the severance agreement where the circumstances of its signing somehow were improper or unfair, this would have to be shown in order to be a valid principle. However, and no matter what the specific language of the severance agreement is, individual state contract law will always be instructive of the basic legal principles at play.
In the general view under most state contract law, a contact simply becomes binding only when and after an agreement is entered into by both parties. So individual states, common law and some federal law, will dictate what makes a contract binding upon signing – in this case, the severance agreement. In addition, once an agreement becomes binding, in most cases both parties are not permitted to withdraw from the terms of the signed agreement, or suddenly renegotiate either the terms or the duration of the signed contract.
The legal requirements of whether an agreement is even enforceable may be determined under the law at the state in which the employment occurred, or at which the employer is located. This depends on where the contract was signed – although no matter where the contract is signed, both parties likely will have to show that it was executed – in this case, when it was returned signed. It is further likely that actual notice will have been given to both parties that the contract is being offered, and that both side’s signatures on a particular document will make its terms enforceable and binding.
When an Employer Might Attempt to Recant
Just as a signed separation agreement or severance agreement can initiate the flow of severance benefits, it may also sometimes provide an employer with the means to stop the flow in unexpected circumstances. And just as employees can waive or release a variety of claims through an agreement, employers may likewise reserve their rights to seek a waiver of a separation agreement, most of which are "bilateral" contracts. Um, wait a minute, you might say…a separation agreement is essentially a contract between the two signatories to the agreement – what could happen such that an employer could seek to unwind a signed agreement? Isn’t the very purpose of a signed agreement to avoid litigation over disputed claims? You’re right…and generally, the fact that a signed agreement is an enforceable contract on both sides of the agreement means that it legally binds both parties to the contract unless a basis exists to pursue revocation or unwind the agreement. Factors that can trigger an employer’s ability to rescind or revoke a signed agreement include fraud, a material misrepresentation of information or even mutual consent to unwind the agreement.
With respect to fraud, signed separation agreements will often contain very broad waivers and general releases of legal claims. When the terms of the agreement are presented to an employee for the first time, and there is no reference to a planned future layoff or closure, the employer will usually be bound by the terms of the agreement. If, however, the agreement is presented to the employee in the context of a baby-busting reorganization plan, the employer may have rendered both the agreement and the termination of employment invalid. The so-called "golden handshake" or "golden parachute" scenarios of prior decades are illustrative of the potential difficulties arising in this area. As the company lay-off and closure times of those decades showed, if the company does not have trust and confidence in management or the financial integrity of the organization, such lay-offs can lead to very costly lawsuits when large severance payments go awry.
Notably, the same type of situation arises when the company fails to follow OTLA or OWBPA requirements during a reduction whether or not a signed agreement is involved, and even if the company proceeds through a RIF, selecting employees based on objective criteria for lay-off, severance benefits, the non-discriminatory basis for selection becomes irrelevant if a conduct inconsistent with FTC regulations leads to a finding of willfulness. Similarly, when material misrepresentations are made by an employer or loss of confidence in the company’s corporate integrity results in victimization of class members, and this is intentional, the employer may be held responsible in a class action. An employer may argue that the separation was agreed-to only in light of the necessary and candid discussions between the parties. The employer may also contend that, without the assurances and representations made to employees, employees would not have agreed to the unwinding of the employment relationship, or, at the very least, would not have so agreed to the waiver of legal rights.
Rights of the Employee
Even if an employee has signed an agreement, employers cannot unilaterally revoke that agreement. Regardless of whether a formal severance agreement exists, it is always best practice to assume that severance agreements will be upheld as a binding and enforceable contract.
If an employer attempts to revoke the terms of a signed agreement, the employee may have claims for breach of contract and/or intentional interference with economic relations. A related theory of damage, however, may be called "expectation damages" (which means that the judge will try to put the employee back in the position he/she expected to be in after signing the agreement).
Employment attorneys can also assist employees in multiple ways in seeking to enforce agreements. First, an employment attorney can write demand letters to the employer, and make threats of litigation (and indeed file lawsuits, if necessary) to motivate the employer to go back on its decision so that such litigation won’t be necessary. Second, employment lawyers sometimes have contacts in the middle of companies, and may be able to reach out to a company employee who works in human resources and motivate that individual to have the deal honored. Of course, the employee can approach human resources directly as well. In most circumstances, the employee can also consider filing a complaint with a government agency – for example, if the agreement applies to some form of discrimination, the employee can file a complaint with the Equal Employment Opportunity Commission seeking its assistance to enforce the agreement.
Recanting for the Employer
If the notice was not served or communicated to the employee within the required 7 day period, the employer must follow the above steps to provide a proper termination notice and timeline to the employee. If proper notice is provided and after waiting the 7 day cooling off period, an employer can proceed with terminating that employee . If an employer is considering revocation of the corresponding severance agreement, it must also issue a written revocation prior to the 7 day expiration of the notice to be effective. An employer should seek legal advice before issuing this revocation to ensure there are no unintentional adverse effects. As indicated above, both Section 209(a) and Section 209(b) provide that an employer who violates the notice provision is liable to the employee for either liquidated damages or civil penalties.
Case Precedents
The context of a signed severance agreement is that it can be signed by either party – the Employer and/or the Employee under the common law and/or by statute. The conditions under which the Employer or Employee may revoke such agreement will depend on that particular agreement’s wording, and also on the background circumstances which have given rise to a negotiation and a signed agreement. The background of an employment relationship, and a particular termination, and how a party has acted during the employment of the parties, and also during contract negotiations, will be relevant to determining whether or not it is in the interests of justice for the court to allow a party to revoke a signed agreement. Such consideration will be very much on a case by case basis, applied by the Court at large.
A case which considered these issues in detail was Athabasca Oil Sands Corporation v. Earthbag Construction Ltd., 2018 ABQB 141. In this case the Employer had entered into 14 contracts with the Plaintiff/elective contractor. The written contract provided for a new contract to be signed every year or so, and was a "building contract" document. After about 5 years of working together, the relations started to sour between the Employer and the Contractor. The Employer claims that the relationship began to deteriorate in "mid 2015". The whole situation was particularly complicated because two companies fell within the Defendant – one essentially owned the other, and both did business under the brand name ‘Earthbag’ and had identical directors. These companies had made several alterations to their standard form contract during the course of re-negotiating each yearly agreement, some of which were noted but not enacted in writing. As such, not all terms and conditions on the signed document applied.
The facts of the case were that the Contractor submitted an invoice for $86, 384 to the Employer on 22 January 2016. On 24 January, the Employer replied by email, stating that this bill was beyond what they had discussed and that they were not going to pay the bill. The Contractor replied, again by email, on 26 January, advising that his conduct would "not be easy to forget" and that if the Employer wished to pursue its position, they would have to pursue the matter in court. From this point onwards, the parties’ relationship deteriorated even further, and the Contractor on 20 June 2016 sent the Employer a demand letter, referring to the fact that "It is apparent that I am no longer welcome or appreciated […..]". Later, on 29 June 2016, the Contractor wrote to the Employer giving it notice that they intended to terminate "my services". The Defendant Company responded on the same day, by writing a formal suspension of work letter and outlining the default of the plaintiff against the contract, alleging that the plaintiff had essentially walked off the job. The Companies also filed a civil claim against the Plaintiff, in which they claimed various amounts of money, and also the right to set off any amounts the Court may find due to the Elective Contractors.
The Court considered the findings of Adams v. Cook, [1904] A.C. 444, which distinguishes between contracts relating to personal services and contracts which are not related to such. For each of these contracts, there are also two types – where the contract states that it is "conditional upon the electors approval", and a contract which is "conditionally binding". The significance of this case, and its distinction between contracts which are conditional on approval by the elector, and those that are not, is that in the former, only the elector/decision maker has the right to accept or reject the offer. In the latter, each party retains the right to withdraw from the contract. When this doctrine is applied to discretion excercised by the decision makers – as is the case with a severance agreement – the contract becomes voidable as soon as the decision maker changes its mind, and either could be revoked.
In light of the above, the Court held that the "long list of non-typographic variations" in the contract provided grounds for rescission. The Contractors had acted as if they accepted the changes (although it had not actually signed) after the letter of 24 Jan. 2016, thereby allowing the Employer to rely on that change, and to unilaterally alter the arrangement established in the original agreement.
While the above-referenced case provides some clarity on the matter of whether or not an Employer can revoke a signed severance agreement, the weight of past legal cases and history of the parties’ behaviour have to be considered. If you feel your Employer has backed out of a severance agreement, it is imperative to seek legal advice.
Conclusion: Best Practices
Regardless of whether an employee is offered a severance package or whether a company is considering requiring a signed, negotiated severance agreement as a condition of severance, certain best practices should be observed .
For Employers
Best practices with regard to severance agreements include:
For Employees
Best practices with regard to severance agreements include:
When drafting or negotiating a severance agreement, the parties are advised to consult legal counsel, as there are many state and federal laws that govern severance agreements.