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The fine print—understanding severance agreements


employee signs severance agreement with non-compete and non-disparagement clauses

If you've been offered a severance agreement, you absolutely need to have an employment lawyer to review it. While a nice chunk of change on the way out the door is tempting, you can get yourself into legal hot water by agreeing to terms you don't understand, or inadvertently violating those terms later (which can lead to a lawsuit). Here at the Employment Law Center of Maryland, we review severance agreements on a flat fee basis, for as little as $155.


Let's start with what a severance agreement is, and then talk about some of the more common terms found in a severance agreement.


What is a severance agreement?


A severance agreement is a contract between you and your former employer. Generally, a severance agreement involves an exchange of money for promises. For example, your former employer agrees to pay you $5,000, while you promise not to work for a competitor for the next two years.


A severance agreement is a contract.

Importantly, you are never required to sign a severance agreement (and it's often the right decision not to). As with any serious contract, you should very carefully consider your options before signing one.


What are some common terms in a severance agreement?


Whereas clauses. Sometimes, a severance agreement starts out with a series of background statements explaining why the severance agreement is being executed (for example, "WHEREAS, the parties wish to end their employment relationship amicably."). This is also called a preamble.


Consideration. Also known as money! To make the agreement enforceable, an employer must offer you some form of consideration in exchange for the promises you're making, and that often takes the form of cold hard cash. The amount is often negotiable, especially with the assistance of an employment lawyer.


COBRA Benefits. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law that requires most employers maintaining group health plans to offer covered employees and their covered family members the opportunity to continue coverage under an employer's health plan when the coverage would otherwise end. It's common for severance agreements to provide for the former employer to cover any COBRA premiums for some period of time.


Perks. Creative employers will sweeten the deal by offering to cover moving expenses or even paying for you to get a new cell phone (since you're probably handing over your work one). The sky's the limit here, and you shouldn't be shy about asking for perks.


Outplacement services. You may be offered outplacement services, which are generally third-party companies that assist a departing employee with obtaining a new job or transitioning to a new career. Frankly, we don't often see our clients getting a lot of value out of these services, especially in the age of electronic job applications (for example, Indeed.com), but it's still offered occasionally.


Confidentiality. It's a safe bet that your severance agreement will have a confidentiality provision. Depending on the language used, either (1) you can disclose the existence of the agreement, but not the terms, or (2) you can't discuss either the existence or the terms of the agreement. This clause often includes a requirement that you return all of your former employer's information and property (including confidential information). Here at the Employment Law Center of Maryland, we often recommend obtaining an exception from confidentiality for immediate family members.


Non-competition. A non-competition clause (also called a "non-compete") prohibits you from working for your former employer's competitors for a specific period of time following your separation. In theory, these clauses should protect your former employer's trade secrets and goodwill. In reality, these clauses create significant legal risk for you, and you should never sign a severance agreement that includes a non-competition clause without first consulting an employment lawyer.


Non-competition clauses create significant legal risk for you. Never sign one without consulting an employment lawyer.

Non-solicitation. A non-solicitation clause prohibits you from recruiting your former employer's employees to a new company or venture. Like non-competition clauses, these are not to be taken lightly (and if you violate it, your former employer certainly won't take it lightly).


Non-disparagement. Many severance agreements contain a provision that prohibits you from "disparaging" your former employer. But here's a red flag—you should be cautious about signing a severance agreement that doesn't define "disparagement." There's no universal legal definition, and without a definition in your severance agreement, your former employer is free to decide what constitutes disparagement, and a comment you see as completely innocent could land you in hot water.


A severance agreement that doesn't define "disparagement" should be treated with caution.

No rehire. Depending on how acrimonious or dramatic your separation from the employer is, a clause may be included that prohibits you from seeking future employment with the company. If you work for a large company that owns several smaller companies, you should be clear on whether you can apply to work for the smaller companies.


Cooperation clause. A cooperation clause provides that you must assist your employer in defending future lawsuits, claims, or regulatory matters related to your employment. This could include being interviewed by the company's lawyers, being deposed, or even testifying in court. If you think this is likely, you should ensure that the clause requires your former employer to compensate you for your time and legal fees.


Bottom Line


As with any contract, you should be cautious about signing a severance agreement, and it's always best to consult with an employment lawyer before signing. This is especially true if your severance agreement contains any of the following:


  • A non-competition clause

  • A non-solicitation clause

  • A non-disparagement clause


Remember, your former employer isn't offering you this contract because they like you (even though you're wonderful, we know), they're offering it to you because they feel it's in their best interests—which means it's often not in yours.


Your former employer isn't offering you a severance agreement because they like you—it's a calculated business and legal decision.

If you've been offered a severance agreement, reach out to us at the Employment Law Center of Maryland, and we'll do a detailed, line-by-line review of it with you, recommend modifications, and, ultimately, tell you whether you should sign it at all.