Checklist For Negotiating And Drafting Severance Agreements On Behalf Of Employee Clients

Howard T. Reben, Esq.
Adrienne S. Cohen
Reben, Benjamin & March
97 India Street
P.O. Box 7060
Portland, ME 04112
(207) 874-4771
hreben@rbmlawoffice.com

INTRODUCTION

We have designed a checklist of items that employees facing termination of their employment should consider when negotiating severance agreements with their former employers. Certain items may be more or less relevant to your personal situation. The checklist is designed in accordance with the belief that each employee is an individual with distinct priorities and goals. While your top priority may be obtaining the most money from your former employer, another employee's goal may be to facilitate a transition into a new position. Therefore, it is crucial to begin by thinking about what is most important to you and the goal of your severance negotiations. This information is not intended to be legal advice and the reader is directed to the relevant state or federal law and to the services of a qualified attorney for advice as to his/her particular situation. The purpose of this information is to provide the reader with the opportunity to be exposed to various options for consideration.


  • SHOULD YOU SETTLE OR SHOULD YOU SUE?

You should talk to a lawyer about whether you have a cause of action under state or federal law for employment discrimination on the basis of a protected trait (race, sex, age, disability) or whether you have some other potential non-discrimination claim (breach of contract, defamation, invasion of privacy). A good lawyer will be able to tell you whether you have a claim that is worth pursuing in court or which may provide leverage in settlement negotiation. On the other hand, it is also important to think about whether you are willing and able to endure litigation, which can be protracted and costly. Is your employer willing to offer you a good settlement in exchange for your release? If so, what do you want to achieve from settlement? Money? Continuance of insurance benefits? A positive letter of reference? It is important to clarify your goals.

  • SHOULD YOU WITHDRAW ADMINISTRATIVE CHARGES?
Your former employer is going to be concerned about exposure to future litigation, especially if you have filed a Charge of Discrimination with the Maine Human Rights Commission or Equal Employment Opportunity Commission. As such, your employer will most likely insist that settlement is contingent upon your withdrawal of the Charge of Discrimination. If you have not already filed a Charge, your employer may insist on a provision in your severance agreement that forbids you from filing an administrative charge. Note, however, that the EEOC's position is that covenants not to file an administrative charge are not enforceable. 

See e.g., EEOC v. Astra USA, Inc. , 94 F.3d 738 (1st Cir. 1996).

  • ENSURE THAT THE TERMS OF YOUR SEVERANCE AGREEMENT WILL REMAIN CONFIDENTIAL.
As a severed employee, you should be concerned about your future marketability to prospective employers. Disclosure of the terms of your severance agreement can have a negative effect on your marketability. Insist on an agreement that the terms of your severance agreement will remain confidential. For example, a carefully drafted confidentiality clause will prevent your former employer from being able to disclose the fact that you retained counsel, asserted legal claims, or filed an EEOC or state administrative charge. The agreement should indicate that the employer will not disclose information inconsistent with the severance agreement or the letter of recommendation.
  • SECURE A NEUTRAL REASON FOR YOUR TERMINATION.
The stated reason for your termination can have a powerful effect on your eligibility for unemployment compensation benefits and your future marketability. Under Maine law, you will not be able to receive unemployment compensation benefits if you "resign voluntarily without good cause" or are fired for "misconduct." Therefore, if you have been terminated involuntarily, do not agree to sign anything that says that you resigned without a provision that the employer will not contest your claim for unemployment compensation. Also, you may be able to negotiate with your former employer to provide a more beneficial explanation for your termination, one that will not disqualify you for unemployment compensation benefits or dissuade prospective employers from hiring you. Among such explanations are "employee wishes to pursue other opportunities", "corporate reorganization/reduction in force", or even "reasons to be kept strictly confidential."
  • OBTAIN A POSITIVE LETTER OF REFERENCE FROM YOUR FORMER EMPLOYER.
If at all possible, insist on obtaining a positive letter of reference from your former employer. Such a letter protects you in the face of state laws that immunize malevolent employers from liability for "good faith" disclosures of information regarding your job performance to prospective employers. You may ask a lawyer to draft a positive letter for you or you may draft it yourself and submit it to your employer for signature. Relying on your prior written (favorable) evaluations may facilitate agreement by the employer on the text of the letter. Once a letter is negotiated, you should insist that your former employer designate a specific individual who will field all inquiries from prospective employers and who may not make statements inconsistent with the letter or the spirit of the letter of reference or disparage your job performance. Often the employer will agree to provide a positive reference only if you agree not to reapply for employment. Note that such an agreement not to reapply may be a significant sacrifice if your former employer is a large corporation with several affiliates or with potential to merge with or acquire new affiliates. If you must agree not to reapply, make sure your agreement is limited to the corporate entity, as it now exists.
  • SANITIZE YOUR EMPLOYEE PERSONNEL FILE.
You should insist on the removal of all adverse references from your personnel file.

Maine's law provides that employers are presumed to be acting in good faith unless the employee can show by clear and convincing evidence, knowing disclosure, with malicious intent, of false or deliberately misleading information. 26 M.R.S.A. § 598 (2002).

While many employers will not remove parts of the file, your employer may be willing to place all sensitive information about you in corporate counsel's files. In that case, be sure to secure the right to review the file to ensure compliance with your agreement. Once this sensitive material is buried in corporate counsel's files, it is rarely, if ever unearthed.
  • NEGOTIATE THE RETENTION OR RETURN OF COMPANY PROPERTY.
Should you reach a severance agreement with your former employer, you do not want to be deemed to be in breach of the agreement for failing to return company property. Talk to your employer early on to decide which documents and property belong to the employer and which belong to you. Depending on your circumstances, you may be able to negotiate to keep certain items, such as laptops, company cell phones, or even a company car. Have your employer acknowledge in writing that it received all company property that you returned.
  • DO NOT AGREE TO A NON-COMPETITION AGREEMENT THAT IS UNREASONABLE.
If you signed a non-competition agreement when you joined your former employer, you may be able to negotiate for a release from the covenant as part of your severance package. If you have not already signed a non-competition agreement, your employer will often demand that you sign one as part of the severance agreement. In that case, be sure that it is precisely and narrowly drawn. Under Maine law, covenants not to compete must be reasonable in scope, time, and geographic location. Watch for language that prohibits you from "indirectly" competing. Do not rely on the fact that the covenant, as written, seems patently unreasonable and thus unenforceable. While common law courts would not alter covenant provisions, a trend is emerging whereby courts are willing to revise a covenant to make it reasonable. 
  • NEGOTIATE THE FORM AND AMOUNT OF YOUR SEVERANCE PAY.
Whether your severance pay is classified as wages/salary or severance and how it is paid may have an effect on tax treatment and continuation of insurance and/or COBRA benefits. For example, you may prefer a lump sum payment, but it is often easier for the employer to continue your health insurance and to delay the COBRA start date if payments are to be made periodically. You may want to check to see whether your employer has a written severance pay plan and, if relevant, what other similarly situated employees have received. Also, you may need to research the employer's solvency so you can be aware of any risk of default that might require a personal guarantee that your severance will be paid. You should include an acceleration clause or a liquidated damages provision in the event that your employer defaults on payment.
  • ENSURE THAT YOUR EMPLOYER PAYS ALL OF YOUR EARNED WAGES AND COMMISSIONS.
It is important to note that Maine law imposes time limits on employers for payment of earned wages and commissions.  Failure to pay earned wages within the time prescribed by law exposes employers to liability for three times the amount of the unpaid wages or commissions plus attorneys' fees. 

See e.g., Brignull v. Albert, 666 A.2d 82 (Me. 1995).
See e.g., Community Telecommunications Corp. v. Loughran, 651 A.2d 373 (Me. 1994).
26 M.R.S.A. § 626-A (2002).

  • PROVIDE FOR THE CONTINUATION OF YOUR HEALTH INSURANCE/COBRA BENEFITS.
Employers can often provide continuation of health insurance and other medical benefits during a salary continuation period on the same terms as during active employment at the employer's expense. If not, there may be an option for you to pay to continue your health insurance and COBRA. COBRA provides you with the right to continue group health insurance or medical coverage at your existing benefit level and rates for up to 18 months after your off-payroll date. In the severance context, COBRA provides that your employer can agree to pay the cost of continuing your benefits after you are off-payroll as part of a severance package.  Note: employers with fewer than 20 employees have no COBRA obligation, however you may be able to negotiate with the employer to pick up the cost of "substantially equal" coverage.
  • DISCUSS YOUR PENSION/401K OPTIONS.
A difficult situation arises when your employment is terminated close to your vesting date. If you have a pension plan, determine what type (defined benefit, defined contribution, simplified employee pension, or employee stock ownership plan). If you are requesting a lump sum distribution, check the rollover and withholding rules. If you are a high-level employee, is there a supplemental retirement plan (sometimes called a "top hat plan") that would have an effect on ERISA's vesting rules? If you are close, but have not yet vested, you may want to negotiate for an agreement to extend your employment status until vesting, or alternatively, negotiate for acceleration of your vesting rights. One creative solution is for the employer to place you on a leave of absence, with pay, to maintain you as an active employee for vesting purposes.
  • NEGOTIATE THE EXERCISE OF YOUR STOCK OPTIONS.
Are you a participant in a qualified or unqualified stock option plan? If so, when is the option exercisable? If you have acquired even a small percentage of stock as part of your salary or compensation, majority shareholders may owe you a fiduciary duty to disclose material information about the company's stock. Does the company have a right to purchase your stock options back? You may be able to force the company to buy them back.
  • SECURE YOUR ACCRUED PAID VACATION TIME.
Accrued vacation is an absolute entitlement under Maine law, regardless of the strength or weakness of your job performance or any misconduct on your part. Maine law requires an employer to pay an employee any outstanding wages and commissions, including vacation pay within a "reasonable time" if the terms of employment provide for paid vacation.  You should also be familiar with your company's specific policy or practice regarding accrued vacation.
  • NEGOTIATE FOR ACCRUED SICK LEAVE.
Again, familiarize yourself with your company's policy or practice regarding accrued sick leave. While there may be no legal entitlement, this may be useful to you as a bargaining point.

29 U.S.C. § 1161 et seq.
26 M.R.S.A. § 626.

  • NEGOTIATE PURCHASE, LEASE, OR RETURN OF COMPANY CAR.
You may want to negotiate for purchase of the car or continued use of the car for a stated period of time. If the use is to continue, be sure to state who pays for insurance, gas, and maintenance.
  • DISCUSS CONTINUATION OF ANY MISCELLANEOUS BENEFITS.
Employers can continue to provide other benefits during a salary continuation period, such as life insurance, disability insurance, and other privileges (car leasing, country club memberships). Likewise, if you have any outstanding loans, you may want to negotiate for a release of the debt as part of your severance package.
  • CONSIDER A CONSULTING AGREEMENT.
A creative solution may be to stay on with the employer as a consultant. Consulting agreements are often beneficial to both you and your employer, as your employer may have a continuing need for your knowledge and expertise and you may find some relief from the harsh economic and psychological effects of termination. Note, however, due to the contractual nature of the agreement, careful drafting is essential. Do not agree to take on any significant or mandatory duties, the non-performance of which would give rise to a claim for breach of the agreement and justify non-payment of severance by the employer. Use language such as "the employee may, in his or her sole and unreviewable discretion, do X, Y, Z...". In some circumstances, you may be able to negotiate being paid for simply being available for telephonic consultation, and if the agreement is carefully worded, you may even obtain additional income while seeking new employment. The advantage from the employer's perspective is that a consulting agreement does not cost anything over what the employer is already paying, but it can provide a substantial psychological benefit to you. As the adage goes, "it's easier to find a job when you have a job."
  • CONSULT A TAX ATTORNEY ABOUT TAX TREATMENT OF FUNDS RECEIVED IN SETTLEMENT OF EMPLOYMENT DISCRIMINATION CLAIMS.
The Small Business Job Protection Act of 1996 provides that only damages received "on account of personal physical injuries or physical illnesses" are excludable from income. Emotional distress, and its attendant physical manifestations (insomnia, headaches, stomach disorders) are not physical injuries resulting in excludable damages. In other words, compensatory and punitive damages resulting from any non-physical injury are now taxable. Likewise, damages received from employment discrimination claims are taxable. Therefore, whenever possible, your attorney should plead physical injury. For example, in a sexual harassment case, your attorney may allege a tort claim of assault and battery if there is any physical contact to support the claim. Another way to avoid tax consequences may be to file an attendant workers' compensation claim or utilize a current existing claim if, for example, sexual harassment has rendered you unable to work due to depression or workplace stress. Any settlement funds attributable to a workers' compensation claim are not taxable. You should consult a tax attorney to decide how to handle tax treatment of any award or fees.

8 Pub.L. No. 104-188, § 1112(a).

  • DO NOT SIGN A RELEASE THAT OFFERS YOU NO PROTECTION.
Your employer is going to be concerned about exposure to future liability for employment discrimination and therefore will want you to sign a general release of all claims. Your signature on a general release will preclude you from suing that employer in the future, so know what you are signing! Certain federal laws have been enacted to ensure that employees are not unknowingly signing away their legal rights. For example, the Older Workers' Benefit Protection Act (OWBPA) requires that the release of potential age discrimination claims under the ADEA must be knowing and voluntary under the OWBPA. In these cases, the employer will insist on specific language referencing statutory rights and claims under the ADEA, that the employee has been advised in writing to consult with an attorney, and that the employee was given at least 7 days to consider or revoke the agreement. Note that you cannot sign away your Workers' Compensation claims without approval from the Worker's Compensation Board.
  • INCLUDE AN INTEGRATION CLAUSE IN YOUR SEVERANCE AGREEMENT.
Once you have reached an acceptable agreement with your employer, the last thing you want is for your employer to be able to claim that your agreement is incomplete or that it does not accurately reflect your negotiations. An integration clause makes the agreement virtually impenetrable. It typically contains a statement that the parties (you and your employer) have not relied on any representations, promises, or agreements other than those set forth in the written agreement; that the written agreement is the full and final expression of your negotiations; and the agreement may only be amended by a writing signed by both you and your employer.

These helpful hints should make you better prepared to discuss your severance with a qualified attorney. The advice of counsel along with assistance in negotiation and document preparation is essential.


Reben, Benjamin & March
97 India Street, P.O. Box 7060
Portland, ME 04112
Phone: (207) 874-4771
Toll Free: 877-413-0861 | 800-622-7911
Fax: (207) 772-6402
e-mail

Located in Portland, Maine, Reben, Benjamin & March assist clients in Augusta, Biddeford, Falmouth, Kittery, Lewiston, Portsmouth, Saco, Waterville, and Yarmouth, and in Cumberland County, York County, Sagadahoc County, Androscoggin County, and Lincoln County.