Introduction to New York Severance Agreements
Severance agreements are contracts between employers and departing employees. These contracts lay out the benefits and promises the employer is willing to make to get a legally enforced release of claims, including discrimination claims, from the employee. In the past, this arrangement has worked for employers and employees because it provides certainty of both the payment employees are receiving and the legal claims being released in exchange for the payment. Employers are willing to pay more to release more legal claims.
Most of New York’s large employers have been engaged in these types of contracts with employees for a long time. These contracts have become known as severance agreements or separation agreements.
The agreement would typically provide the employee with a severance payment, in addition to any payments the employee is owed upon leaving employment , such as salary, PTO, bonuses, etc. In return for the severance payment and other benefits, the employee releases all claims "arising out of" the employment relationship. This catchall language protects the employer from all claims. In theory, it is a fair bargain to pay severance in exchange for the employee not bringing a lawsuit.
In practice, however, it is important to ensure that the severance agreement is not used as a pretext to discriminate against or retaliate against an employee for participating in protected activity. Employers that have followed the law, including by obtaining knowing and voluntary releases in exchange for severance payments, nonetheless find themselves in the same situation as other employers when the issue arises.
Handles claims of discrimination and retaliation and prevents lawsuits from being brought against employers.
Requirements of a Severance Agreement Under New York Law
In New York, for a severance agreement to be enforceable, certain legal requirements must be satisfied.
When employing individuals over the age of forty, and offering a severance agreement as part of a separation package, an employer must comply with the Age Discrimination in Employment Act of 1967, so long as the severance package is subject to that law. Under ADEA, the employer may not discriminate in the termination of employment based on age, unless the discharge is for good cause or the termination is the result of a plant closing or mass layoff. More specifically, the ADEA prohibits age discrimination in hiring, firing, promotion, compensation, and other employment-related decisions. In addition, ADEA requires that when a workplace termination involves severance being offered to a discharged employee, the employee must, among other things, be informed of ages of all employees within the affected particular job classification who are either being dismissed or who are not being dismissed but are otherwise affected by the proposed action.
To meet the requisite ADEA requirements for a valid and enforceable severance agreement, the employer must confirm that any employee over the age of forty is being dismissed as part of a manner that "the individuals are not being selected or rejected for employment opportunities on the basis of their ages." The employer offering severance in exchange for release(s) of employment-related claims within the United States may provide to the employees being terminated a list of ages of all individuals in the same job category who are being terminated. In providing this notice, the employer will have to take into account whether the employer is notifying all applicable employees within a particular job classification or function at the same time, that the employer is going to terminate all employees in that job classification or function. In instances where the employer is not terminating all employees in a particular job classification or function at the same time, the employer may provide identification of those employees who are being dismissed from the workplace within a set time-frame. Finally, in the very limited circumstances where the employer is not providing notice to all employees in a particular job classification or function, the employer may provide the ages of only those employees who are being terminated and not all employees in the affected job classification or function.
In the event that the employer is going to implement a reduction in force for at least twenty-five employees that will affect at least twenty-five employees during a thirty day period at a workplace or facility in New York, the employer must provide to the employees terminated from employment with that facility individual notice of their terminations. The notice must include the reasons for the reduction in force, the job titles of those individuals affected by the reduction in force, the number of employees in those job classifications who are being terminated, the ages of these employees, and the ages of all individuals in the same job classifications who are not being terminated. A failure to advise affected employees of their rights under the New York State Worker Adjustment and Retraining Notification Act gives rise to a civil action against the employer for the amount of unpaid wages for each day of violation, up to a maximum of thirty days. In addition, the State of New York can bring civil action against the employer for a penalty up to five-thousand dollars for each employee for which a notice was not provided.
The New York State Department of Labor has authority to investigate and prosecute violators of the New York WARN Act. Further, that department has the authority to require the employer to pay the required wages and penalties. Other than an action for the unpaid wages and penalties, the New York WARN Act does not expressly provide for a private right of action.
Essential Provisions to Include in a NY Severance Agreement
Non-disclosure agreement. Sometimes, particularly for high-level employees, employers require that employees also agree to keep confidential all of the company’s proprietary information during and after employment. Particularly for high-level executives, employers may want to ensure that all that the employee learned during employment remains confidential post-termination. This is especially true where the company’s trade secrets and confidential information is its most valuable asset.
Non-competition agreement. Similarly, many employers require that employees agree not to compete with them. New York does not overly protect the right to compete, and employers may obtain injunctive relief barring an employee from competing at least for a duration of years and within a limited geographic area. When drafting a non-compete, employers should remember that courts are more likely to enforce a shorter duration and smaller geographic area than longer and larger. Therefore, the duration and geographic restriction should be no longer and no broader than necessary.
Non-solicit agreement. Employers often require employees to agree that they will not attempt to dissuade other employees from leaving their jobs, and not to attempt to persuade customers from doing business with their former employer.
Release. A mutual release of all claims by all parties is often a requirement, along with a waiver of the right to participate in any class actions. While a generalized release of all claims is appropriate at the time a severance agreement is drafted, the older the employee and the more likely the potential for discrimination claims, the more specificity the agreement should include. For example, New York requires that an employee waive his/her rights under the Age Discrimination in Employment Act (ADEA) specifically, and the waiver comply with the requirements of 29 CFR 1625.23. Substantively, Section 1625.23 requires that among other things, the employee be advised to consult with an attorney, and that the employee wait 21 days to accept the terms of a separation agreement. Employers, too, must wait seven days after the employee signs the agreement before they are obligated to pay the severance amount.
Rights of Employees Under New York Severance Agreements
Employee Rights and Severance Agreements in New York
Understanding when an employee can decline to sign a severance agreement requires an understanding of the rights provided to the employee by the New York State Human Rights Law and the Age Discrimination in Employment Act. Under these laws, an employee who is age 40 or older has the right to a minimum of 21 days’ notice of a severance agreement ("waiver") releasing the employer from additional liability. The employee has the right to change his or her mind even after the 21 days have passed and that severance agreements providing for different periods are not enforceable until 7 days after the employee signed the agreement.
The above employer requirements are in addition to the federal laws requiring that employers provide certain minimum information to employees at the time of their separation, including requesting that employees notify the employer of any known potential claims against the employer arising out of their employment. It is important for an employer to request such notification so that it has actual knowledge of any such claims, thereby potentially defeating a later argument that the waiver’s release of claims was "unknowing" and unenforceable.
In addition to the employer’s obligations under law, an employee also has the right to negotiate the terms of his or her severance package. As it is impossible to predict what benefits are going to be attractive to any given employee, it is difficult to predict what the employers of all employees should provide in order to anticipate how an employee might react to a severance package. Out of fear of being accused of discrimination, many employers avoid expressly providing severance packages to some employees. Employers should provide packages to employees who are "involuntarily terminated," because there is no danger of being accused of discrimination when the package is provided to an employee due to a layoff. However, if an employee is involuntarily terminated for cause, then there exists the possibility that the employee might make a discrimination claim, stating that the discharge was discriminatory, rather than on the basis of cause, i.e., a failure to meet performance goals or inappropriate conduct.
In order to guard against the above accusation, an employer should not immediately send an employee a severance package when he or she is terminated for cause (or otherwise if there is a concern under the particular circumstances that the termination might have been discriminatory). Instead, the employer should, if possible, politely inform the employee that he or she is being terminated as soon as he or she has been terminated. Immediately after the above, the employer should be open and willing to hear the employee’s side of the story. Finally, the employer should inquire whether the former employee is willing to explore a severance package to resolve any potential claims against the employer, negotiating in good faith. Asking the above questions will provide the employer with the former employee’s reaction to the termination, and give the employer the opportunity to negotiate an appropriate severance agreement.
Common Errors in NY Severance Agreements
The same rules and format that apply to separation agreements also apply to severance agreements. When drafting this type of document in New York, employers mistakenly:
- Avoid giving the employee a period of time to review the agreement before signing. One of the advantages of using a severance agreement is that it gives the employer a chance to control the messaging surrounding an employee’s departure. If the agreement is presented and signed in one quick meeting, the employee might not fully understand the terms, which might lessen the likelihood that he or she will comply with the post-employment obligations contained in the agreement. This may be particularly true if the employee is upset about being laid off and is simply looking forward to getting out the door as quickly as possible. We recommend building in a minimum period of one or two business days for an employee to review and sign a severance agreement.
- Use vague and general boilerplate language rather than clear, specific provisions. Some employers use the same separation agreement as a template for their severance agreement and simply change the references and the "effective date." Employers often try to save money in the short term by doing this, but it can cost them in the long term if they have to litigate the enforceability of provisions that are applicable in the separation agreement but not in the severance agreement. For example, many separation agreements contain a strong and clear waiver of the right to compensation related to any claims under the New York Labor Law requiring payment of wages . If that provision is missing from a severance agreement, the employer may not be able to enforce its understanding of the employee’s rights and obligations.
- Use restrictive employee categories. Many severance agreements contain a general agreement covering the protection of the employer’s "current and prospective clients" or "current and prospective customers." As long as these terms are well defined, they are acceptable. However, "current" can be a very important term. For example, if an employee was terminated on November 1st and then signed a severance agreement on November 5th, a restrictive covenant protecting against solicitation of "current customers" would protect the employer only from solicitation of those customers with which the company had a relationship on November 1st, and not future customers that the employee may have developed a relationship with during the course of the employee’s employment, particularly if the employee had a role in business development.
- Include indemnification provisions. Indemnification provisions are agreements for one party to pay certain costs and expenses incurred by another party in responding to a claim brought by a third party. In the context of a separation or severance agreement, these provisions are usually focused on providing some level of protection against a charge filed with a government agency. However, it is critical that this protection include a limit on liability for the employee, as well as an acknowledgment that the employer is responsible for its own negligence.
Negotiating a Severance Agreement in NY
Negotiating a severance agreement, particularly the amount of severance pay, is critical to an employee. When discussing negotiations, it is important to note fourteen commonly handled issues during a severance negotiation discussion:
- Umbrella "Release" agreement
- Non-compete post-employment obligation
- Non-solicitation post-employment obligation – employee non-solicit
- Non-solicitation post-employment obligation – client/customer/vendor non-solicit
- Confidentiality
- Reimbursement of certain expenses
- Payment of all wages/bonus
- Reference issue clause
- Indemnification clause
- Vesting of options/stock compensations
- Non-disparagement
- Tax treatment of lump sum payment vs. installment payment of a lump sum payment
- Governing law
- Arbitration provision
Never engage in negative comments about your employer, and this may be a condition of your separation/termination.
When to Consult with an Attorney
Employers and employees alike would be wise to consult an attorney with experience in the field if they are uncertain of their respective rights, or if disputes arise over interpretation or enforcement of the agreement. Similarly, those who are responsible for administering the agreement may have questions that can be answered only by an experienced employment law attorney . Such questions may arise when a party withholds benefits or takes other adverse action allegedly prohibited by the agreement. Parties may also seek counsel if one of them believes that the agreement has been breached.