Defining a Severance Agreement
A severance agreement is a contract between an employee and an employer that releases the employer from claims in exchange for some type of compensation. Severance agreements are contemporaneously executed with termination of employment. While severance agreements have traditionally followed the cessation of employment, the trend is to include them in new hire or separation packages.
The purpose of a severance agreement relates back to the formation of employment contracts through common law litigation. Prior to the advent of the employment-at-will doctrine, if a contract was breached by one party, the non-breaching party could sue to recover damages. Today, Florida is an employment-at-will state. An employee may quit and an employer may terminate the employee for any reason. In many instances, the employee’s compensation may have been below his or her market-value. In order to recover compensation for future financial loss as well as to negate the risk of litigation, severance agreements, or contracts , are entered into.
The terms of a severance agreement can vary depending on the parties involved and the amount of compensation a former employee elects to forgo by entering into the severance agreement. The basic terms of a severance agreement are:
Some forms of alleged wrongdoing that are often claimed against an employer include: violation of an express or implied contract, violation of federal, state, and local statutes, workplace harassment and/or discriminations claims. Of course there are other kinds of claims, such as misrepresentation or enticement to stay at a job, that fall outside the above categories. An attorney can provide counsel regarding these other types of claims.
Depending on the industry and size of the company, a given company’s severance agreements may be very similar or very different. However, under the Age Discrimination in Employment Act, severance agreements that relate to the cessation of employment in exchange for severance pay must meet certain requirements.
Requirements of a Severance Agreement Under Florida Law
The Florida severance agreement statutes and rules governing severance pay agreements are found in Florida Statutes 440.12 and 440.13. Florida law requires the settlement of a workers’ compensation claim to be approved by a judge of compensation claims. However, certain employer responsibilities can be transferred to a claims handling party or insurance company. The following provisions shall apply: A copy of all compromises, settlements, releases, or other termination or suspension of carrier payments shall be forwarded to the division within ten days after execution. Most importantly, the settlement must be made without threats, harassment, or coercion of the employee. Specifically, according to 440.20(11): (11) Nothing contained in this section shall prohibit any compromise, settlement, release, or other termination or suspension of carrier payments if requested by the injured employee and found by the judge to have been made voluntarily, with full knowledge of the rights waived by the employee, and without fraud, duress, or similar inducement by the employer or the carrier.
Essential Components of a Florida Severance Agreement
When an employee’s job is terminated in Florida, the employer may offer a severance agreement. A severance agreement is a contract in which the former employee releases the employer from liability in exchange for something of value. The purpose of such an agreement for the employer is to obtain peace of mind, knowing that it will not be sued or held liable for any employment-related claims that the employee may have.
Although not strictly required by Florida law, any severance agreement should contain the following essential elements:
• payment factors;
• confidentiality clauses;
• non-compete clauses;
• non-disparagement clauses;
• health benefits packages; and
• return of property.
Several of these terms can be negotiated with the employer, but the extent to which an employee can negotiate the terms of the agreement depends on the bargaining power of each party.
Common Mistakes Made in Florida Severance Agreements
Severance agreements are often drafted by human resources professionals who may not be detailed oriented or counsel who are not well versed in employment law. Common pitfalls include the following:
- Missing language. Sometimes employers understand that a release of claims (sometimes called a separation and release agreement) must be stated to be mutual, but they forget to make the release mutual. In other words, the agreement or will list claims to be released from the employee but not from the employer. In Florida, the list must be reciprocal. In other words, the employee must generally release all claims against the employer and the employer must also release all claims against the employee in the same agreement.
- Not confirming the employee understands the agreement. Under the Older Workers Benefit Protection Act, offers of severance can only be made to employees aged 40 years or older if the employees are given at least 21 days to consider the agreement and a seven day revocation period after signing the agreement. A common problem is that employers do not follow this very specific procedure even if they want to do the right thing. If the employer waives the 21 days, they must specifically acknowledge the waiver from the employee. Otherwise, the employee will not be bound by the agreement which can lead to further litigation.
- Not complying with the Fair Labor Standards Act. The Fair Labor Standards Act requires employers to pay non-exempt employees all earned wages immediately upon discharge. Severance agreements will not waive an employee’s right to earn all earned wages for work performed at the former employer. However, some employers will make an unlawful deduction from a severance payment if the person’s time was not accurately submitted to payroll. Deductions from a lump sum severance is permissible as long as the deduction does not violate minimum wage and overtime requirements for work performed prior to the termination.
- Not disclosing COBRA rights. Often employers sever employees because their medical benefit plans are no longer beneficial to the company or will be too expensive to continue. A severance agreement provides employers the opportunity to disclose COBRA rights to employees and avoid liability from the separate COBRA notice required by federal law. However, employers can only avoid liability if the contract and the COBRA notice comply with the regulations. Employers should request a review from a COBRA administrator to ensure compliance and avoid costly liability.
- Withholding dates of employment. Under Florida Statute 448.11, a Florida employer is prohibited from not paying wages to an employee without a good faith basis, defined under the statute as simply not having the required funds. Employers can avoid liability under this statute by hiring counsel and providing the last paycheck and a list of amounts withheld from the check to the employee. Employers should be careful to avoid withholding wages without a good faith basis or their employees may use Florida Statute 448.11 to seek payment and additional damages.
How to Negotiate a Severance Agreement in Florida
Whether you are an employer or an employee, knowledge is power. A severance agreement should be used carefully and with an attorney to ensure your legal rights are preserved while making sure your business is protected.
Some points to remember in negotiating either a severance agreement from an employee or a severance agreement as a terminated employee are as follows:
- Set a baseline and stick to it. An attorney can help you realize the value of your claim. Regardless of your employment status, knowing the total cost of a severance and just as importantly, the minimum amount of money you should be willing to accept is crucial to any negotiation.
- Use mediation or other forms of alternative dispute resolution. The key to any settlement is being able to see both sides of the coin and appraising the financial exposure and potential of a case. For an employer, be reasonable in your demand to see what the employee may be entitled to; conversely, a terminated employee must use a settlement demand and negotiation skill to receive an additional benefit.
- Be careful about what you say. Always be cautious when discussing your case. I have seen one too many times where an employee admits to things that they shouldn’t admit or I have seen too many people agree to things that they shouldn’t agree to. This almost always means less money for the employee . On the employer side, we are seeing more and more inappropriate comments (either aggrandizing or degrading) that will later come back in the form of a lawsuit. Slander, defamation, injury to business reputation, etc. are all issues an employer must be on guard for. This is why an employer should consider "neutral" letters of reference and allowing a person to list an employer on a resume but not letting a former employer to give a reference.
- Consider tax implications and the effect on unemployment benefits. Typically, money received from a severance agreement counts as money received while working for the employer and would have to be recorded on a tax return. Further, severance pay may mean that an individual is not eligible for unemployment insurance benefits. The issue usually occurs if the severance is paid over time and will also depend on whether any non-compete agreement is also in play.
In conclusion, and especially in an economy where most severance agreements on termination of employment are deeply unfavorable at best. Think of reasonable people and the logic behind the severance and try to reach an agreement with a common sense approach. The more rigid of position you take, the more likely the outcome from the severance agreement will be expensive (in legal fees, time taken away from actual business for the case to be resolved) and obstinate. Just like the reasonable person standard with an Employer against an employee – be reasonable.
Legal Counsel and Representation
Florida severance agreements are an important part of many Florida employment law issues. Most employees want to receive a severance package from their employers upon termination. Employers on the other hand, usually want to avoid litigation (therefore, the incentive to provide the employee with a severance package). Therefore, in most situations, there is room to negotiate the terms contained in the severance agreement. Additionally, in order to ensure that the severance agreement is valid, employees must knowingly and voluntarily agree to the terms spelled out in the severance agreement.
There are often many clauses contained in the severance agreement which the employer does not want to change. However, your best opportunity to negotiate those terms is when the employment relationship is coming to an end. It is therefore important to protect your legal rights by having your severance agreement reviewed by an attorney who regularly represents clients in negotiating severance agreements. However, it is equally important to hire someone who is experienced in litigating employment disputes, as these attorneys are best able to evaluate the language in the severance agreement and how it can impact your rights in the future, should you need to engage in litigation.
Breach and Enforcement of a Severance Agreement
Courts will enforce severance and release agreements when properly executed and fully supported by consideration. For that reason, Florida courts will hold a former employee to the terms of a voluntary severance agreement that they voluntarily signed if the agreement is based on consideration flowing both ways – that is, what the parties are giving and receiving is equal to the benefit given up and received, and the employees are consenting to it of their own free will.
The employer’s basic duty is to ensure that the agreement contains an accurate assessment of facts and the rights the employee is releasing. To avoid later challenges, the former employee should have the benefit of discovery and an opportunity to hire counsel to review all relevant documents and statements prior to the signing the severance agreement or release. If the employee does not do this, the agreement otherwise stands.
Under the Florida common law doctrine of equitable estoppel, a party cannot fairly sit back when it has notice and an opportunity to act, but instead stand by and allow a reliance interest to be established, and then assert a position inconsistent with that interest. State ex. rel. Fla. Real Estate Com’n v. Septien, 642 So.2d 1086 (Fla. 1st DCA 1994). Using this principle, many businesses will include a "no challenge" provision that specifically binds the employee to a standard of review should the employee later challenge the alleged termination or involuntary resignation. The employee then gives up the right to assert a different position asserted in opposition to the company’s action, and the court will enforce that part of the signed agreement if it is part of the agreement and signed by the employee. Here is a sample provision:
To the extent the employee later challenges the alleged termination or involuntary resignation, the employee affirmatively obtains value by specifically agreeing, as a condition of this settlement, that should he/she later file a legal action challenging the termination or involuntary resignation, then the employee agrees that the standards for review of the decision for the matter will be under State ex. rel. Fla. Real Estate Com’n v. Septien, 642 So.2d 1086 (Fla. 1st DCA 1994) and otherwise, the acceptance by the employer of the resignation with the payment of money and/or benefits constitutes full and final settlement and resolution of the matter and bars any further review or challenge to the employer’s actions since the agreement has value to the employee.
Under this arrangement, the court will enforce the standard of review stated when the employee decides to challenge the separation agreement.
Finally, in a statutory breach of severance agreement claims filed pursuant to the following statutes, the courts maintain exclusive jurisdiction over enforcement and set the civil penalties for failure to comply with the statute’s requirements. If the award is significant, the employee could become liable for the legal fees associated with that action. F.S. 215.425(4)(c)-(f); F.S. 440.3876; F.S. 440.3879(4)(d) – but those costs must for a claim brought pursuant to the statute, and not another form of claim.
Current Trends and Developments in Florida’s Severance Requirements
A notable trend in recent years is the increased demand for consideration in exchange for a general release in Florida severance agreements. Former employees’ attorneys are presenting employers with demands for additional consideration, claiming that a general release of all claims is not adequate consideration for waiver of the right to sue. While this argument has been raised in different contexts, such as with regard to repayment of alleged wage violations, our readers should be aware that former employees are now making the argument in the severance agreement context as well.
In a recent dispute, an employee separated from her employment and was offered severance, which included a general release of all claims. She was a Florida resident and a licensed attorney, and she told the employer that she did not sign any agreements with any of the entities or individuals that released her claims. The employer requested proof of that statement, and the employee notified the company that she had in fact signed a waiver with a different entity , but did not state when the agreement was signed. The employer asked the employee to submit the waiver agreement for its review and prior to signing the severance agreement, but the employee refused. Rather than taking that refusal as an indication that the employee was likely to sue, and terminating the employee for insubordination, the company decided they would continue processing all paperwork – including payment – on the separation date, and that the employee would get paid, regardless of whether or not she signed the separation agreement. The employee then informed the company that she would not execute the separation agreement without greater consideration, and that if the company did not offer her more money the matter could become contentious. She further stated that if the company were to cut her pay or not pay her at all (for a full and final payment), that she would pursue litigation.
We will keep you updated on this ongoing dispute.