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Severance Agreements: What Are They Good For?
September 5, 2013
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Employers frequently use severance agreements when terminating an employee or when an employee resigns with the hopes of reducing potential liability.  In our practice, we often advise employers to offer severance pay that is memorialized in an agreement containing a general release, covenant not to sue and often indicates that the employee is resigning.  Since an employee has no legal entitlement to severance pay, the majority of the time, he or she accepts the offer and typically the employer does not hear anything else from the employee.  However, this is not the case with all employees and it is imperative employers understand the benefits and downsides to severance agreements and how the EEOC and Virginia Unemployment Commission view these agreements.

In practice, severance agreements significantly reduce a company’s liability exposure by minimizing the risk of litigation and administrative proceedings.  Offering pay that an employee is not already entitled to will often placate an otherwise disgruntled employee by providing additional financial assistance.   Typically a severance agreement will offer severance pay, include a confidentiality and non-disparagement clause, a general release by the employee of all claims and often indicate that the employee is resigning from his or her employment. 

However, what if an employee refuses to agree to language indicating he or she resigned or counters with a demand for significantly more pay?  In reality, what an employer believes it is receiving differs from how the administrative bodies of the EEOC and Virginia Unemployment Commission view the agreements.

Mutual Releases and Covenant Not to Sue. Severance agreements typically require the employee to release the employer from any claims he or she has through the date of the agreement and an express agreement not to sue the employer.  Employers are most often concerned about discrimination claims filed with EEOC and offer severance in hopes of avoiding any potential claim which, even if frivolous, can cause a company to incur substantial costs defending the action. EEOC guidelines conclude that while a signed release and waiver may be enforceable where it is knowingly and voluntarily consented to, it cannot be used to limit an employee’s right to testify or assist in any investigation conducted by the EEOC or prevent an employee from filing a charge of discrimination with the agency.  Additionally, an employer cannot require an employee to return the severance pay prior to filing a charge.

Requiring Employee to Resign. Typically a severance agreement will include language indicating the employee is resigning instead of being terminated.  Employers often request this language based on the belief that such language would cut off any claim for unemployment. In Virginia, an employee that quits his or her job is not eligible for unemployment compensation.  However, how should an employer respond where an employee refuses to agree to such language? Is there any benefit to an employer to mandate such language? The answer is that employers should not let this one issue be a sticking point for finalizing a severance agreement.  The Virginia Unemployment Commission has determined that voluntarily leaving, which would typically disqualify an employee for benefits, does not include situations where an employee quits in lieu of discharge.  When the only alternative to resigning is that the employee will be discharged, the Virginia Unemployment Commission concludes that this is not a voluntary act and the employee will not be disqualified from receiving benefits.  However, employers can allocate severance payments for any period following separation so as to be counted as wages.

The foregoing only touches on the issues Virginia employer should be aware of when offering severance.  In most cases, it is still highly recommended for an employer to offer severance, as it is an effective way to reduce future liability. But like many issues in law, this is not black and white.