When a layoff or termination occurs, one of the most common questions to arise is whether the employee is entitled to severance (or separation) pay. Employees may be anxious to get any compensation they can, while employers may be looking to limit their responsibility or offer severance packages on their own terms. The most important thing to note here, however, is that under New York law, an employer is not required to give an employee severance pay, except in limited circumstances.
EARNED WAGES VS SEVERANCE PAY
Severance pay should not be confused with earned wages. An employer must pay an employee any wages earned, regardless of whether the employer terminated the employee. The employee is entitled to receive a final paycheck, including earned commissions and guaranteed bonuses, on the first scheduled payday after the employment ends. Severance pay is a benefit that is usually offered by an employer voluntarily upon the employee’s termination and is commonly accompanied by a severance agreement. Alternatively, some employers may offer a severance package pursuant to company policy. In either event, the severance pay amount is usually based on the length of the employee’s employment.
An employee may have a right to severance pay under an initial employment agreement or union agreement. If an agreement provides that the employee is entitled to severance in the event of separation from the company, it is important that the employee review the terms carefully, since his/her/their entitlement to certain rights under the agreement may vary depending on the reason for termination. Often, severance pay is not available if the termination was for cause.
Severance pay may also be given upon termination under company policy. Businesses may offer severance pay in situations involving a large number of layoffs, to minimize bad publicity for the company or make the company more competitive in the job market.
COMMON PROVISIONS IN A SEVERANCE AGREEMENT
In most circumstances, the employee will be required to sign a general release of all claims against the employer in order to receive the offered severance package. By signing a release of claims, the employee is giving up the right to sue the employer. The release should only cover events that occurred prior to the layoff or termination. However, the scope of the release can be as broad (i.e., where the employee releases allclaims relating to his employment) or as narrow (i.e., where the employee waives the right to sue the employer for specific claims) as the parties want.
In addition to a release of claims, the employee often must agree to certain restrictive covenants. A restrictive covenant is a contract provision that prohibits an employee from engaging in certain activities after the layoff or termination. The most common restrictive covenants in a severance agreement include:
- Nondisclosure (or confidentiality). This clause prohibits the employee from utilizing or disclosing the employer’s proprietary information, or any other information he obtained during the course of his employment, after his departure from the company.
- Non-disparagement. Under this provision, an employee cannot make disparaging, negative, defamatory or false statements about the employer, or statements that may otherwise harm the employer’s reputation. An employee could request a mutual non-disparagement clause.
- Non-competition. Employers will frequently request that employees refrain from starting competitive business or working for an existing competitor.
- Non-competition covenants must be reasonable in time and geographic area.
- Non-solicitation. This restriction precludes an employee from soliciting the employer’s customers or suppliers in order to prevent unfair competition.
In any event, the employer and employee can seek to negotiate alternative or additional terms. The employee can request additional pay, an extension of health care and other benefits, the exercise of stock options, outplacement assistance and other conditions.
CONSIDERATIONS BEFORE SIGNING
For employees, an important issue to consider is whether waiving the right to sue the company for any reason is reasonable under the circumstances. If an employee has a potential claim, he/she/they should weigh the strength of the claim and cost to pursue it against the benefits offered by the employer. Note that a strong claim also gives the employee more leverage in negotiating a favorable severance package. Employees should consult an experienced employment attorney before signing a severance agreement.
Employers should talk to legal counsel when drafting their severance agreements to ensure the offer is fair and they are protected from future liability.