Drafting Severance Agreements: Protecting Your Business from Lawsuits
When an employment relationship ends, a well-crafted severance agreement is your strongest defense against future litigation. However, a poorly drafted exit package can leave your business exposed to discrimination claims, regulatory fines, and costly lawsuits. At View Ridge Law, our team provides the skill needed to construct legally binding releases that fully protect your organization.
1. The Foundation: Mutual Consideration
For a release of claims to be legally binding, it must satisfy the contractual element of legal consideration. This requires the employer to provide a financial benefit that the employee is not already legally entitled to receive.
Attempting to condition a release on the payment of final unpaid wages or accrued Paid Time Off (PTO) will render the agreement entirely void. Valid consideration must be an added benefit, such as a lump-sum cash payment, extended COBRA health insurance premiums, or accelerated stock option vesting.
2. OWBPA Compliance for Older Workers
If the departing employee is 40 years of age or older, the severance agreement must strictly comply with the Older Workers Benefit Protection Act (OWBPA). Failure to meet these rigid statutory requirements completely invalidates the waiver of age discrimination claims.
To be compliant, the agreement must explicitly cite the Age Discrimination in Employment Act (ADEA) and advise the employee in writing to consult with an attorney. Furthermore, the employee must be given at least 21 calendar days to consider the agreement, or 45 days if the termination is part of a group layoff. Once signed, the employee has a mandatory 7-day revocation window to cancel the agreement.
3. Comprehensive Releases and Regulatory Carve-Outs
A bulletproof general release must explicitly enumerate waivers for claims under Title VII, the ADA, and the FMLA. You should also include a “Covenant Not to Sue,” which clarifies that if the employee breaches the agreement and files a lawsuit, they are liable for your attorney fees.
However, the agreement cannot strip employees of all legal rights. You must include explicit “carve-outs” stating that the employee retains the right to file charges with the EEOC, the NLRB, or the SEC. While you cannot prevent an employee from reporting to these agencies, the agreement can mandate that they waive their right to personal financial recovery from those administrative proceedings.
4. Restrictive Covenants and Execution
Recent rulings by the National Labor Relations Board (NLRB), such as the McLaren Macomb decision, have made broad confidentiality and non-disparagement clauses illegal for non-supervisory employees. Drafting must now include explicit Section 7 carve-outs for these workers. Additionally, if your agreement protects trade secrets, it must incorporate the statutory immunity notice mandated by the Defend Trade Secrets Act (DTSA), or you forfeit the right to recover punitive damages in a theft lawsuit.
Finally, never disburse severance funds during the mandatory 7-day revocation window, as the agreement is not yet fully enforceable.
5. Partner with Our Team
Securing your business operations requires a strategic roadmap built on knowledge. View Ridge Law provides the guidance needed to draft compliant, litigation-proof severance agreements. For related needs we do not offer in-house, such as corporate accounting, we connect our clients with our trusted referral network.
Contact our team today at 206-703-0764 or reach out online to schedule a consultation.
