What is a Texas Severance Agreement?
Severance Agreement Defined
A Texas severance agreement is a contract between the employee and employer. It is typically used where the employee has been terminated and the company wants to avoid a later lawsuit. If such a lawsuit arises, Texas law requires that the employee file a claim with the Texas Workforce commission (TWC) before filing a civil case in court. The severance agreement can help avoid the risk that the employee files a claim with TWC as the first step in the claims process.
The agreement can also be used in situations where termination of employment is not involved but a settlement is reached.
For many, the severance agreement may be totally foreign concept. They hear the term and don’t really understand how it is used. They may think that the lawyer just made the name up. But it really is a widely understood term in the employment law community . The severance agreement is most commonly used by companies when the company no longer needs the employee’s services. Rather than instant termination, the severance agreement is offered to the employee to provide some payment and some rights to receive continued pay after the notice period ends. A 3 month offer is a common time period with payment spread over those months following the period of work. It is used to limit the employees’ rights to file a lawsuit. This is normal.
The severance agreement is not a guarantee of employment. It is not your right to anything. It is very similar to any other sale of something where the seller is simply being asked to sign off on the sale so the buyer does not have to deal with any further ownership. Just like any other sale, the seller will want a price, in this case payment by the company.
Common Elements in a Severance Agreement
For Texas severance agreements, there are many clauses and provisions that a company will typically include. Some, like the payment elements, are relatively standard in many severance agreements. Those payments will likely include one or more of the following: If the departing employee is a higher level or key officer or executive, the severance amount may be larger, and could include post-employment benefits, such as stock options, medical insurance, and car allowances. Sometimes the agreement will provide for an initial payment in exchange for a release of any legal claims, and then additional payments over time, as long as the release remains in effect. Of course, the agreement must comply with the requirements of Internal Revenue Code Section 409A, if applicable, to avoid adverse tax consequences.
In addition to the payment elements, the standard provisions in a Texas severance agreement will likely include: each of these provision is designed from the outset to protect the company from an expensive lawsuit by the departing employee. If the employee violates any of those provisions prior to the termination date, the standard provision is that his severance payment ceases and he has to return any payments already received.
Deciphering the Release Provision
The heart of every severance agreement is the release clause whereby the employee acknowledges that he has no remaining legal claims against the employer. It is a complete waiver of all possible legal claims that employee might have for acts that occurred up to the time he signed the release. This can include sexual harassment, age discrimination, racial discrimination and wage claims among other types of claims. For the most part, employers will want an employee to sign a release in order to protect themselves in the event of lawsuits. An employee, on the other hand, will want to be able to file a suit if it appears that he was wronged. In Texas, courts have traditionally enforced such releases where there is a good deal of consideration moving to the employee. For example, the payment of severance benefits or extra severance pay in return for the release and waiver. On the other hand, Courts may refuse to enforce a broad waiver where it is in exchange for nominal severance in an employment at will situation. The Texas Court of Appeals notes that signing a waiver and release is not the same as a confidentiality agreement. Even when a release prohibits the employee from making disparaging comments or disclosing confidential information, an employer can require such a waiver to resolve the claim but will not recognize it as a complete bar to a suit. In addition, even if an employee signs a broad release in one lawsuit, he still can sue a company again. However, there are some limitations and exclusions to that ability.
Legal Technicalities and Considerations
To be valid and enforceable, contractual obligations—including mutual releases—must meet several requirements, including that the promises not be voidable or void. If a particular agreement is unenforceable, then it will be as though there was no agreement at all. Under Texas law, a contract that is unconscionable, fraudulently induced, with a mutual mistake of material fact, or that violates public policy is voidable.
Agreements that violate public policy include those that amount to an invalid non-compete or restraint of trade. Severance agreements typically include a "non-disparagement" clause, an acknowledgment by the employee that he or she has not disclosed company trade secrets or confidential information, and sometimes even a non-compete clause. All of these provisions would be void as a matter of public policy if the employee was not given a legitimate opportunity to read the agreement.
The Texas Uniform Trade Secrets Act provides some guidance to employers concerned about maintaining confidentiality of their business relationships and trade secrets. To take advantage of it, however, the employer must include in the severance agreement the applicable statutory language including:
- An acknowledgment of the agreement: "This agreement sets forth the entire agreement between the parties."
- A provision that the employee must consider the provision carefully and consult with an attorney prior to signing: "Employer advises Employee to consult with an attorney before signing this agreement."
- A choice of law provision: "The terms of this agreement are governed by the substantive laws of the State of Texas."
If a non-compete agreement creates an undue hardship on the employee or his family or if the restraint on the employee’s ability to work in his profession or line of business is greater than necessary to protect the employer’s legitimate interest, it is voidable, and an otherwise enforceable agreement may become unenforceable. Courts have ruled that it is inappropriate for an employer to prevent a sales employee from competing, especially when the accounts belong to the customer, because the real value resides in the contact with the customer.
Releases must be mutual and sufficiently specific to meet the standard set out in McCoy v. McCoy, 93 S.W.3d 515 (Tex. App. 2002 Dallas, no pet.) at 518-19. In that case, the court ruled that because both parties to the release were promisors as well as promissee and each released only the rights they might have had against the other, the agreement was mutual in fact. The employer must develop a written agreement that is mutual and contains measurable consideration such as co-pays, co-insurance, monthly premiums, etc.
All releases must comply with the Older Workers Benefits Protection Act (OWBPA). Basically, that law requires that the employee must sign a release of employment claims in order to make a legally binding severance agreement. Even if the employee executes a subsequent release, the employee may still bring a suit for employment discrimination. There are several steps that employers are required to take, according to the OWBPA.
Employers are required to inform employees in writing that age is even a factor in order for the release to have an application to age discrimination claims. The employer must provide a review period of at least 21 days during which time the employee can consider the agreement. The release must include specific language including the employee’s age and whether the employee is over the age of 40. Finally, the agreement must include a 7-day rescission period during which time the employee may cancel the agreement. If not all of these requirements are met, the release is not enforceable.
Agreements with multiple employees require a different approach. Employers who intend to take advantage of the OWBPA benefits are required to provide all employees "an adequate description of class or classes of employment involved." 29 C.F.R. 1625.22 (8)(v). They also must identify groups of employees by age and number within a group, not by name. For example, "50 to 55 years old" and "25-29 years old." Employers also must provide "full and fair consideration" to the severance benefits being offered.
Negotiating the Terms of Your Severance Package
Remember that the less the company wants to give you, the more likely it is that the company will cave to a situation other than where the company wants to give you as little as they want. Think about causes for escalation in the negotiations, because companies often hand you an initial offer with the intent of negotiating you downward. Not all companies are prone to taking advantage of every possible situation, of course, but many companies are. Companies often hope that you will just sign the severance agreement and corporate counsel makes more money and the company pays less money. If you do not take the step to legally protect yourself, you are likely in a worse position to make negotiations come out your way.
Many companies set an arbitrary review period in the severance agreement that runs between seven days and 30 days, from the date in which you receive the severance agreement. Most companies, and in most contracts, have added additional clauses that make waiting until after the review period is over before signing, a mistake. The most common way in which this happens is that there is a drop dead date by which you have to sign the severance agreement, or your window closes. This is very commonly set a couple of days after the review period ends . If you sign after the review period, then the normally common exception has been vanquished and the company is likely to have your severance fully revoked. You are required to sign the severance agreement in order to get the money. And, a lot of times, that money is far and away more than the money that you will ever see in a courtroom. So, ultimately, signing the severance agreement becomes a larger liability on the employee than a chance of a large reward. So, you really need to have a substantial amount of review time to properly negotiate the severance agreement.
The other way that you could go about doing this is to negotiate for a beneficial time period. This requires a small amount of negotiation, because most companies are going to be firm in not giving you longer than 30 days, at least if they have no business reason to negotiate with you. But, I have had cases recently where employees have negotiated for longer review periods. It helps if you are paid hourly. But, you should always review the severance agreement. And, you need to make sure that your review ends at the latest three days before your drop dead date. At that point, you have to decide whether you are going to sign the severance agreement or not.
Top 5 Pitfalls to Avoid
Inevitably, you will see agreements where parties clearly don’t know what they are doing. Here are some of the most common mistakes I see, their consequences and how to avoid them. The first mistake is not hiring a lawyer. Most often the party with the least sophistication in transactions will be the one who forms the least reasonable opinion about the deal. It is a big, bad world out there. Lawyers know it. So hire one. A lawyer can help you structure a deal from a favorable perspective that helps you explain away liability that could otherwise be very damaging. Second, beware of agreements that purport to release future liability. The best example of this mistake is the overpayment release. They are common, but never a good idea. You cannot force someone to give up future complaints, and an overpayment will always be suspect as to whether the employee owes any money. We have only seen one case filed where the employee even tried to collect on the release, and it was a small amount. Third, be reasonable. Deals that are undertaken in the same mindset that rational people do each other favors in life tend to work out. But deals that are reached because someone is threatened and pressed into a corner rarely last. Overreaching agreements and demands often provoke reports to the government, filing of wage and hour cases, wrongful termination claims, etc. And finally, assume it requires an agreement. Not releasing claims has its own problems, especially confidentially. By proceeding without a severance agreement, you give the employee the ability to claim that the issue is resolved by non-response (the lawyer sent a letter that went unanswered and thus gave rise to the assumption that there is no issue). It is almost always better to find a way to structure a deal and like it, than to just walk away.
When to Seek Legal Guidance
It is always a good idea to consult with a lawyer prior to signing any severance agreement or release. Laws vary between states and your situation may be unique, but an experienced employment law attorney may better understand whether the severance agreement or release is fair.
Also, under federal law, employees over age 40 must be given at least 21 days to consider a severance agreement or release before signing it, with 7 days afterward to revoke the agreement. The Department of Labor advice is that an employee may not sign a release or waiver of rights or claims under the Age Discrimination in Employment Act (ADEA) that applies to conduct that occurred before the individual was given a reasonable period of time to consider the agreement and to consult with an attorney. An employee may not waive any ADEA claims that arise after the employee has signed a release. For any release or waiver of federal age discrimination claims, the employee must be provided the period of time, and the ability to use the period, and that the employee understands that he or she can consult with an attorney.
In addition, if the employer has more than 20 employees and is offering severance to more than one employee at the same time, then the employer under Age Discrimination in Employment Act (ADEA) rules must inform group of eligible employees about the offer and advise them to consult with an attorney prior to signing the release.
If the severance is being provided as part of a layoff, then the Worker Adjustment and Retraining Notification (WARN) Act may apply, so you could have additional rights.
State laws on releases may differ from federal law, and you may have additional rights, especially depending on your age. It is conceivable that if you sign the release without speaking to a lawyer, you may not realize you did not get the minimum rights required by law.
Releasing claims gives up your rights to obtain damages or other relief if your employer violated your rights, including seizure of documents that are potentially harmful to employees, such as dangerous workplaces or theft or seizure of personal property, for example. You will certainly want to consult with a lawyer before signing any agreement, which would preclude you from making such claims against your employer.
Case Studies and Examples
To further illustrate the application of Texas law to employment separations, consider the following examples:
Case Study 1 – Severance Agreements: When Jill’s employment ended after 15 years with her employer, the company presented her with a severance agreement. Her supervisor recommended the agreement because he did not want to be bothered with an unemployment dispute should Jill file for unemployment. Jill then signed the severance agreement, which stated: "Employer has no intention of taking any action that would make plaintiff ineligible for unemployment compensation." Jill filed for unemployment benefits two days after signing the agreement. When the employer learned of Jill’s application, it contested the claim on the basis of the agreement but ultimately lost at the Board level. However, the employer successfully negotiated that the agreement be included as a basis for disputing the compensation request so as to prevent the employer from being held accountable for paying out a second severance package if another layoff occurred within 12 months.
Case Study 2 – Disputes Over the Validity of Severance Agreements and Releases: With her employment ending after 25 years, Jan received a severance agreement, the validity of which was to be determined based on Texas law . She promptly signed the contract, but did not completely read its terms. After she retained an attorney, she learned that she could have altered the distribution of her retirement account (the largest asset in the company’s plan) by electing to take a lump sum rather than installments of the retirement money. The company was not willing to renegotiate the severance agreement. Jan was forced to pay taxes on the lump sum received but was denied the option of having those payments made in installments because she had signed a release of all claims. She was able to negotiate a minor adjustment; however, the successful result – getting to keep the money – motivated the employer to make it extremely difficult for the other employees to share in her good fortune.
Severance agreements can be effective ways for employers and employees to attain certainty in their exit arrangements. As seen in these cases, though, sometimes even the best contracts become a source of dispute between these parties – as evidenced by why employment and business lawyers in Texas are so regularly asked to review and negotiate severance agreements for clients.
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