Negotiating Severance and Noncompete Agreements

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I recently had the opportunity to speak to a group of small business owners about how to avoid common mistakes in dealing with employees, especially when it comes to termination. Although Ohio is an employment-at-will state, there are exceptions to this doctrine such as termination based on race, gender, disability or some other protected characteristic. An employer may also face a claim of discrimination from a disgruntled employee following termination. Although the employee has the burden of proving that the employer’s actions violated some state or federal law, defending a wrongful termination claim, even if ultimately successful, can prove very costly for an employer.

A well-written severance agreement is an effective way for an employer to eliminate the risk of later defending a baseless lawsuit. Of course, many employers loathe the idea of having to incur legal expenses to draw up such an agreement. Worse yet, many employers cannot understand the logic in having to pay an employee compensation he or she is not otherwise entitled to. However, it can be far more cost-effective to resolve an employment dispute by way of a severance agreement rather than getting embroiled in protracted litigation where the results are both expensive and unpredictable.

Determining how much to pay as a severance is not an exact science. However, it is not uncommon that the amount of severance will be tied to the employee’s length of service with the employer. As an example, an employer may choose to pay one week for every year the employee was employed. Likewise, the employer will have to consider whether to pay the severance as regular wages over the severance period, or pay it as a lump sum.

The severance agreement should contain broadly written language releasing the employer from any and all claims arising out of the employee’s employment. Many agreements specifically list each and every claim an employee is releasing. The most important thing is to make sure that the agreement is valid and enforceable. As an example, if the employer wishes to obtain a valid release of federal age discrimination claims, it must strictly comply with the provisions of the Older Workers Benefit Protection Act (OWBPA). To obtain a release of these claims the agreement must:

  1. Be in writing.
  2. Be written in plain language.
  3. Give the employee 21 years to consider the agreement and seven days to revoke following execution of the agreement.
  4. Advise the employee of his or her right to consult with an attorney.

Of course, there are certain claims that cannot be released in a severance agreement. As an example, unemployment compensation claims, workers’ compensation claims, claims arising after the parties sign the agreement, claims for vested benefits under the Employee Retirement Income Security Act, and the right to file charges or complaints with and/or participate in investigations conducted by government agencies such as the Equal Employment Opportunity Commission, the Ohio Civil Rights Commission or National Labor Relations Board cannot generally be released in a severance agreement.

Finally, including provisions for confidentiality and non-disparagement can buy the employer confidence that the employee will not make any damaging statements after the agreement is signed. Employers often express concern that an employee will tell co-workers that the employer paid a severance. An employer can protect itself by including language which requires that the employee maintain strict confidentiality about the terms of the agreement. Likewise, an employer can protect its reputation by including language in the agreement that the employee shall not make any disparaging statements about the employer. The agreement can also include penalties for liquidated damages should the employee breach either of these provisions.

Employers also need to think about protecting their business at the outset of the employment relationship. Depending on the type of employment and the service the employee is providing, an employer may want to consider having the employee sign a noncompete agreement. Noncompetes will restrict an employee from competing with a former employer upon termination of employment, regardless of the reason for the termination. Although an employee may try to challenge the validity of the noncompete, courts will enforce the agreement provided the restraint is no greater than necessary to protect the employer’s business and it does not impose an undue hardship on the employee. Generally, noncompete agreements need to be reasonable as to the duration and geographic location to be enforceable. Although these agreements are generally signed at the beginning of the employment relationship, an employer that is ending an employment relationship and offering a severance will want to reiterate the terms of the noncompete in the severance agreement.

The bottom line is consulting with an attorney on these matters up front on can save an employer huge legal fees down the road.  Kristen Kraus

Tony Vain Investigations

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