Severance Agreements

In general, severance agreements are contracts entered into between employees and their employer that provide for payment of benefits to the employee in the event the employee loses his or her job without cause. They may be entered into in an initial employment agreement or later, after it is decided that the employee will be terminated. Employers are not obligated to enter into such agreements, but often do so in order to either entice potential employees or soften the blow of termination.

Does ERISA or Section 409A apply to your severance agreement? These agreements, however, can raise many legal issues that must be digested before an employee can have a sufficient understanding of the agreement. The first such issue often relates to the body of law under which the agreement will be governed. Depending on how the severance agreement is structured, it may be subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or Section 409A of the Internal Revenue Code (“Section 409A”).

When does Section 409A apply? In general, Section 409A applies whenever an employee has a legally binding right to compensation that is not payable until a later year. An employee does not have a legally binding right to compensation if the employer may unilaterally reduce or eliminate the compensation after the services creating the right have been performed. Notwithstanding that, a right to compensation subject to a contingency, such as termination for other than cause, will still constitute a legally binding right.

What happens if Section 409A applies to my severance agreement and are there any exceptions? If Section 409A applies, certain requirements must be met and, if they are not, the employee faces significant penalties. Fortunately, Section 409A provides an exception for certain severance arrangements, as severance paid pursuant to an involuntarily termination, a termination for good reason or a window program is not subject to Section 409A to the extent that the severance pay meets certain requirements relating to the timing and amount of the payment. In addition, severance pay may be structured to meet another Section 409A exception known as the “short-term deferral rule” whereby payment is completed within a certain amount of time following the year in which the termination occurs. Accordingly, it is incumbent on any employee negotiating a severance agreement to identify which body of law applies to the arrangement and craft the agreement to fit within the purview of Section 409A’s exception, if necessary.

Why are you being asked to sign a waiver and release in connection with your severance agreement? Additionally, in exchange for a severance benefit, many employers require the employee to execute a waiver and release of future employment-related litigation against the employer. This raises multiple issues for employees, who first must be able to accurately assess if they have any such potential claims in order to make a full and accurate decision regarding the desirability of the waiver and release. At the same time, various federal statutes provide certain protections, such as waiting and revocation periods, that an employee must be aware of before signing the agreement. Likewise, under federal law some rights pertaining to employment discrimination cannot be validly waived, regardless of any provisions in a severance agreement to the contrary. As a result, it is imperative that employees are aware of their legal rights prior to signing off on a waiver and release in exchange for a severance payment.

Did you just lose your ability to collect unemployment insurance? Another important issue that must be considered in crafting a severance agreement is whether collecting under the agreement would disqualify the employee from collecting unemployment insurance benefits. In New York, the answer to this question depends on the nature of the severance payments; therefore, it is critical for the employee to keep this in mind when crafting and negotiating the terms of the agreement.

Have experienced counsel assess proposed or existing severance agreements. In sum, while the payment of a severance benefit may initially seem attractive, especially to an employee who is losing his or her job, severance agreements raise many underlying legal issues that must be assessed before being signed. Employees must be aware of all of their rights under the law, and how those rights are affected or limited by provisions in a severance agreement, before entering any such arrangement.

Blitman and King provides cutting edge, practical advice for clients in the Albany, Buffalo, Manhattan, Long Island, Rochester and Syracuse NY areas.