What’s a Severance Agreement?
A severance agreement is a legally enforceable contract between an employer and an employee. It may be part of a company’s policy to provide a severance agreement to exiting employees, or it may be agreed to by the parties on a case-by-case basis as part of a final separation, termination or resignation. The agreement sets forth a final understanding of certain concrete terms and conditions of a recent employment separation and, by virtue of the agreement, the parties waive their rights to make employment claims against each other arising out of the terminated employment. It is often the most important single document reducing disputes between the parties to finality and establishing closure of the employment relationship .
A severance agreement in the employment context typically will contain at least some of the following provisions:
Not every severance agreement will contain every item listed above, nor will every severance agreement necessarily have these provisions in any specific or uniform manner. For example, not every severance agreement will necessarily have a waiver and release of employment claims, but almost all of them will have a non-disparagement clause. Some severance agreements will have a confidentiality provision, which prevents the parties from discussing the agreement itself with others. Very few severance agreements will have both a non-solicitation clause and a non-compete clause. Generally, non-competes are disfavored and heavily disincentivized by law, so they have little place in a separation agreement. In addition, the representations and warranties clause may be subdued in a separation agreement because of the employer’s superior access to company records, documents and materials.
What is the Revocation Period?
Now that we know for sure that a severance agreement is an enforceable contract, we need to think about what that means for you as a business owner or employer. Are there obligations that come along with it? What do those obligations look like and when do they apply? One of the obligations that comes into play is the need to provide employees with a time frame for revocation of the agreement. This sounds like a thorny issue but is actually both easy to understand and implement in your agreements.
The revocation period gives a party to a contract the right to unilaterally go back on what it has already agreed to. In the context of an employee severance agreement, an employee may previously have provided consent to the terms of a severance agreement along with a waiver of claims against their employer. However, they are then granted a certain amount of time to review these terms with an attorney of their own choosing and decide whether or not to pursue legal action against the employer in connection with their termination. If they decide to proceed with legal action, the mere signing of the agreement becomes meaningless because the consent was revoked.
This may seem like a lot of effort for the sake of no benefit to the employer, but there is an important reason why it is needed. The Uniformed Guidelines on Disputed Discrimination Claims require the inclusion of a revocation period before a waiver of rights to be valid. Some courts also apply it generally to all releases, under the theory that the employee must have a chance to review the contract terms so that they are actually informed of what they consented to.
To be on the safe side, most experts recommend following the same process even if the agreement is not with an employee. First, you should provide the person who will be signing the severance agreement with a copy along with written notice that they have 21 days to review the agreement and incorporate any changes they feel are necessary. If the agreement is effective immediately, you should extend this period for at least five days after signing. If the remaining parties agree, a shorter period may be used instead of 21 days, but it still cannot be less than seven days. If the person rejects the agreement, you should continue to negotiate until you reach a mutually satisfactory deal. Whether or not you succeed in reaching an agreement, you should then provide the person with a copy of the signed agreement along with a notice of revocation period that informs them of the consequences of notifying you that they have decided to revoke their consent.
OWBPA Criteria
But get it right, and your severance agreement with the older worker should state "you have rights under the Older Workers Benefit Protection Act." Specifically, the Older Workers Benefit Protection Act (OWBPA) applies only to employees 40 years and older, and extends the workers’ right to revoke the severance agreement for seven days after signing it. For employees who are at least within 40 days of reaching 40 years old (the "forty in 40" rule), the twenty-one day period for signing the agreement does not apply, but the seven-day period for revocation does. Permitting a longer period for revocation of the agreement than the period you are giving for review of the agreement will not invalidate the release. But permitting a shorter period creates a presumption that the employee was pressured into signing the release (though it may be rebutted.) It is very clear that this is a substantive right; even a contractual waiver of the right to a seven-day revocation period will be ineffective.
Duration of the Revocation Period
The typical duration of the revocation period for a severance agreement could be as short as 7 days. Because of the Age Discrimination in Employment Act (the "ADEA"), however, the revocation period for a severance agreement entered by someone over age 40 cannot be shorter than 7 days.
Nevertheless, there are no other laws that require the revocation period for a severance agreement to exceed 7 days. Indeed, many severance agreements provide that the employee has only 3 days to revoke the agreement or waiver.
It is unusual for the revocation period to be longer than 7 days because the longer it is, the longer the company has to wait before its release of claims pursuant to the severance agreement goes into effect.
How to Effectively Revoke a Severance Agreement
The revocation period for an employee is set out in the release itself. If the release contains the seven-day or 21-day revocation period, those days may fall on a weekend or holiday. Revocation of the release is completed by putting the revocation in writing. For protection, the revocation should go out via certified mail, return receipt requested, which provides a paper trail showing that the revocation was sent and received by the employer within the proper time frame . The statute of limitations for revoking the release begins when the employee receives all consideration (i.e. the promised severance) in the same manner as discussed above. Revoke promptly once all consideration is received, but do not delay the entire process to wait until seven or 21 days have passed.
Common Errors
It is surprising how often employers mix up the seven day revocation of severance agreements with the 21 day rule for review of severance agreements contained in the Older Worker Benefit Protection Act. Thus, while severance agreements do not have to be given to employees 21 days in advance of the termination, they do have to be given to employees seven days before the employee has to sign or lose the deal. The latter deadline can be lost if the employer does not get the severance agreement to the employee promptly after termination of employment, if the time from termination to the time the agreement is given is more than seven days. Thus, you never want to put yourself in a situation where the employee feels any pressure whatsoever to accept the severance agreement in a hurry, given that you do not have that right.
In addition, the agreement should also state that the seven day revocation period starts over if the agreement is modified after it was first presented.
It is very important for employers to understand that if you are being nice and offering severance pay to an employee who has not been laid off or fired for cause or without "good reason," it is highly unlikely the employee will sue you, or have much of a case against you.
Therefore, do not provide an employee with the feeling that litigation will happen quickly, given the monetary pressures of attorney fees, etc. In turn, you do not want to create an adversarial climate, which can happen all too quickly. So, again, get the executed agreement with payment to an employee as quickly as possible and do not drag your feet.
If the deal is reasonably fair, then negotiate as best you can, so that the employee feels good about the agreement, and then disengage, so that the employee can sign the agreement and get paid.
So, to keep it simple, always remember:
· Do not require execution of the severance agreement before a 21 day waiting period has ended, without a clear and convincing explanation of why.
· The seven day waiting period is not waived, even if the employee is anxious to receive the severance money and personally drops by your office before the seven days is up and tells you he/she is ready to sign.
Case Studies and Examples
Real-life examples and hypothetical scenarios for applying revocation period in severance agreements
Brian, age 55, was laid off from his company, where he had worked for the last 19 years. Brian received a severance package with severance pay, continued benefits coverage for a year, and other benefits, conditional on signing a full and final release of all claims (severance agreement) within 6 business days. The letter Brian received from his former employer says that the purpose of the 6-business-day deadline is to allow Brian to take the time to read and make sure that he understands the severance agreement before signing. While Brian was out of town for work, he did not have an opportunity to review the severance package. No one told Brian that he could have someone else review the agreement for him at the same time; Brian felt pressured and signed the severance agreement and returned it.
According to the Supreme Court of Canada, such a provision in the letter violates Brian’s right to a reasonable opportunity to retain legal advice and understand the proposed contract. The Court in a case called Machtinger v. HOJ Industries Ltd. (1991) 85 D.L.R. (4th) 652 told us that workers have a common law right to a reasonable opportunity to consider an employment contract and receive independent legal advice before signing. The Court also said that an employer’s waiver of a worker’s right to a reasonable opportunity to consider a contract or obtain legal advice cannot be waved by allowing the worker a week to sign. In this case, if Brian was not given a reasonable opportunity to read the severance agreement, he can go back to his former employer and tell them he wants more time to sign it, and this time, Brian must be informed that he can have someone else review the severance agreement for him at the same time.
Martha, 38 years of age, worked for her company for 10 years as a marketing executive. Martha was laid off on May 15, 2015 and was offered a severance package that included 12 months of pay, 12 months of benefits coverage, an additional career transition support in the form of her own career coach, and a promise that her company would pay $.00 for her legal fees for reviewing the terms of the severance package. In fact, Martha takes her severance agreement to her lawyer and receives one hour of legal advice. Her lawyer tells her that she will likely get at least 18 months of pay and benefits plus her promised career coach support if she insists on negotiating for better severance. Martha’s lawyer tells her that she should sign the severance agreement but before she does, her lawyer edits the severance agreement to add an extra three weeks for her to sign it.
Martha returns the severance package to the company with her lawyer’s edits of the severance agreement. The company immediately agrees to add one month to Martha’s severance (so now Martha has 13 months of severance pay, 13 months of benefits coverage, etc.). But they do not agree to give Martha time to think about the change in the agreement to allow for 4 weeks to approve her signature. The company says they will only agree to 2 weeks and then the company refuses to agree to change the agreement to say that they will pay Martha’s legal fees to have the severance agreement reviewed again by her lawyer.
If this were to happen, it is possible that even two weeks is an unreasonable delay for Martha to have to sign the amended agreement. A judge could take the view that there is nothing to stop the company from being unreasonable about the time it takes for Martha to sign the severance agreement, which would allow for the company to have all of Martha’s signed documents to defend their position when Martha later sues to ask for more than what is offered in the severance agreement. If this happens, the company can have $40,000 in severance pay added to its severance costs if a judge finds that the company should pay Martha if the revocation period is deemed not to be satisfied.
FAQ: Revocation Period for a Severance Agreement
In order for a release or waiver of claims to be valid under the Older Workers Benefits Protection Act (OWBPA), an employee must be given at least 21 days to consider whether to accept the offer in her severance agreement. For layoff or plant closing programs, an employee must be given 45 days under OWBPA to consider whether to sign the agreement. Certain waivers of claims under the ADA or FMLA also require longer consideration periods. (See the Older Worker Benefit Protection Act for further details.) Even in individual negotiations, it is a good idea (and a best practice) for employers to give employees time to consider their severance agreements before execution. When that consideration period expires, the employee has the right to rescind the agreement until the end of the revocation period, that is, seven days after execution . The employee may acknowledge that the rescission period has expired (often done in severance agreements) in order to avoid an argument that the revocation was in fact timely. As a best practice, most severance agreements contain language allowing for this 7-day rescission period. The following is an example: Employee acknowledges that he/she is being given [insert number of days] to voluntarily sign this Agreement and [insert number of days] to revoke it. Employee understands that if he/she revokes his/her acceptance of this Agreement, he/she shall return all Severance Payments and other benefits received on or after the date of this Agreement. Employee’s revocation must be in writing and must be sent to [insert name] via [insert method of delivery]. The date the revocation is postmarked or received by the Company will be deemed the date of revocation. Employee may submit his/her revocation any time up to and including the seventh day after signing this Agreement.