What does the agreement have to be titled?
I was recently asked if the severance agreement needs to have a specific title in order to be valid. The title does not have to contain specific words, and are usually titled "general release" or "severance agreement." The title, unless it is clearly erroneous or confusing, does not change the type of agreement or the rights the parties are agreement to release. The key here is what the parties are actually releasing in the terms of the document.
What claims can the parties agree to release?
Release of Unknown Claims
The idea of the severance agreement is to buy some certainty that there will be no litigation following the employee’s separation from the company. The employee (and employer for that matter) can waive all known claims. However, in California, for any party to release unknown claims, the agreement needs to be clear and advise the party that they are releasing unknown claims. Ideally, the agreement should set forth section 1542 of the Civil Code, which states:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
Release of Age Claims For Older Workers (over 40 years old)
The Older Workers Benefit Protection Act of 1990 (OWBPA) provides workers over 40 years old with additional rights. The OWBPA places additional requirements on employers asking “old” employees to waive their potential claims the Age Discrimination in Employment Act of 1967 (ADEA). Here is a summary of the requirements employers need to meet:
- The agreement must be written in a manner that the employee can understand.
- The waiver specifically refers to the employee’s claims or rights under the ADEA.
- The employee cannot waive claims that have not yet arisen
- There must be consideration (the employer must give value to the employee which was not already owed to the employee - this has to be present in every severance agreement, not just those releasing age claims)
- The employee is advised to consult with an attorney
- The employee is given at least 21 days to consider the agreement (the employer may have to offer up to 45 days – the employer should check with counsel to see if this is necessary); and
- The agreement may be revoked up to 7 days after it is executed.
Other Provisions To Consider For Severance Agreements
An employer should also consider if the agreement needs to address other issues, such as:
- Is the release mutual (i.e., the employer and employee are both releasing all claims against each other)?
- Should there be a non-competition/trade secrets provision?
- Is the agreement confidential? If so, is there a liquidated damages provision where the parties agree to a certain monetary amount the breaching party will pay?
- Will the employer provide a reference statement? If so, the language of the statement should be set forth in the agreement.
- Should there be an arbitration provision to deal with any issues that arise from the severance agreement?
- Should the employer include a choice of law clause in the agreement that determines which state law will be controlling in the case of a dispute?