The Importance of Severance Agreements for Workers Under 40

What are Severance Agreements?

A severance agreement is a contract which is used to compensate an employee in connection with their termination and in exchange for a promise. What promise is the employee making? Well, it depends. A severance agreement will typically have a number of the following components:
A severance agreement may be either standard or tailored. With a standard severance agreement, the employer has an "off the shelf" version that it uses for all of its employees. In the case of a tailored severance agreement, the employer will draft a new agreement specifically for the employee being terminated, with consideration to the employee’s specific circumstances.
Now, as to how the above applies to employees who are under 40 years old. In Ontario, the Employment Standards Act, 2000 ("ESA") states what an employee is entitled to upon termination of employment if nothing else has been agreed to. This is referred to as the "minimum standards". Persons under 40 years of age have likely not been employed for very long and therefore , their minimum standard entitlements under the ESA are somewhat low. Persons under 40 years of age also typically possess lower seniority/compensation than older employees.
As such, employers often regard persons under 40 years of age as being more easily replaceable and agree to severance agreements which do not provide as extensive a benefit to a terminated employee as what they would provide someone over 40 years of age.
In fact, a terminated employee under 40 can find himself/herself in a very difficult dilemma when negotiating a severance agreement because contracting out of ESA minimum standards leaves that employee without any recourse under the ESA. An employee cannot "top up" his/her ESA minimum standards via his/her common law entitlements. As such, an employee under 40 may feel that he/she has no option but to agree to the terms of his/her severance agreement. In fact, many terminated employees under 40 do sign off on their severance agreement without challenging the terms therein.

Severance Provision Requirements

The key provisions in severance agreements typically include a non-compete clause, a confidentiality agreement, and a compensation package. Many times, an employer will ask its employees to sign a non-compete agreement, or will offer the employee who is being separated a non-compete agreement (whether it relates to the employee’s current role or a different, more senior position). A non-compete restricts an employee from working for a competitor or starting a similar business for a certain period of time and within a certain geographical area. The most common time period is six months but it can easily be longer or shorter. The geographic restrictions are often a hotly contested topic and because these agreements can be enforced or not based on how reasonable they are determined to be, it makes sense to at least get a basic understanding of what employer’s have in mind with respect to their business restrictions. If the time period or scope of the provision is unreasonable, then there is a good chance that the Court won’t uphold the named geographic areas or periods of time.
Confidentiality agreements are common as well. The employer does not want the employee sharing any confidential information with anyone as a condition of the severance pay offered. Confidentiality agreements in employment contracts can also be a broad sweep which can even cover information one would not expect. Again, the language in these agreements is of paramount importance because you don’t want to sign something which prevents you from working in the field you have always been in or has the potential to create long-term issues in your future.
A well written severance agreement will provide for severance pay, sick pay, all pay that is due (including bonus, vacation, unpaid commissions). The employer can also give employees the option to continue their health insurance by agreeing to pay their portion of the premiums. Many employers even offer job placement assistance, counseling, and help with a resume.
The key point is that a severance agreement with key provisions that last a long time is difficult to heal from later. What was first thought to be thousands in severance pay can now become a breach of contract and an embarrassing situation. It is worth the phone call to an attorney so that the severance agreement doesn’t turn into a phone call to an attorney years down the road when the former employee is served with papers.

Rights of Employees Under 40

In contrast to the older employees in our initial example, employees under the age of 40 have significant legal protections, whether employed in Minnesota, Wisconsin, or Iowa. This is not to say that there are no legal protections owed to those over 40; rather that the law assumes that over-40 year olds have full awareness of their rights and responsibilities when signing a severance agreement. Under the law, persons under the age of 40 are given certain protections when it comes to severance packages. For instance, employees under 40 need to be provided an additional 15 days to consider the severance agreement. While the majority of severance agreements will contain an explicit waiver and release of all claims against the employer, the typical notice period under the law applies to all persons except those under the age of 40. If the person signing the severance agreement is under 40 years of age, their notice period is 21 days. In addition, employees under the age of 40 have 7 days after they sign the severance agreement to revoke it and take back their employment with their current employer. Severance agreements offered to persons under 40 must have the specific language that states the employee has 7 days to revoke the agreement after it has been signed and that it will otherwise not be effective until this period has passed. After the 7-day period has passed – and if the agreement has not been revoked by the employee – the employee will receive the severance package as outlined in the agreement. The "universal vs. individual release" clause is the other major area where employees under the age of 40 are protected. The law provides that employees under 40 may only sign a universal release that releases all claims against the employer. In other words, the employer cannot ask them to specifically waive their rights under the various employment-discrimination laws enumerated above (like the Older Workers Benefit Protection Act (OWBPA) or the Minnesota Human Rights Act). Rather, they employer can use a more general release that puts a broad stop all potential claims. If an employee has an employment contract, there is a possibility that it could be possible for an employee to successfully get out of the contract by obtaining a "release" that allows the employee to get out of his or her employment obligations. In other, much rarer circumstances, an employee has a common law claim that arose during his or her time of employment. However, when it comes to employment contracts (and related torts), the employee generally has the right to insist that his or her employee contract be followed and cannot waive his or her right to enforce the contract. It is important to note that employees under 40 do not have an infinite time to revoke any agreement they enter into with their current employer. If the employer asks you to go home rather than work, their obligation to pay you your wages still stands, despite your termination. When it comes to severance agreements, employees under the age of 40 generally have a higher level of protection and ability to seek remedy if their rights under those protections are violated.

Entitlements When Negotiating a Severance Package

When negotiating a severance package, it is important to understand the company’s priorities in considering what you must have in order to get your signed Authorization or Release of Claims. The first area to consider are outstanding salary or bonus payments. That is the amount of money that you can immediately recognize, rather than have potentially tied up in equity or some other out year form of remuneration. The second area to consider is anything that provides liquidity outside of the company (e.g., uncashed but promised bonuses, reimbursement for incidental expenses, etc.). The third area is career enhancing and benefit items that provide immediate value after one leaves employment (e.g., vacation, unused paid time off or accrued sick days).
Lastly , and perhaps the hardest area to ascertain for someone under 40 years of age, is the value of any equity in the company. In this instance the issue then is how long is the vesting period (the time period by which you have to remain employed in order to own the equity outright), what the percentage of the equity that is vested and the % of the equity that is exercised (taken into possession so that they can be sold), and the current as well as future value of the equity in order to recognize its potential appreciated value. The valuation of equity is incredibly complicated. You want to make sure that you have a compensation consultant value the equity so that you understand what it is potentially worth and you can negotiate accordingly.

Mistakes to Avoid

When it comes to severance agreements, there are many mistakes that employees under 40 make that can have significant impacts on their long-term finances. In my experience, employees who are under 40 years old make the following three errors:
Mistake #1: Not knowing what you have before you enter into a severance agreement or "release" and not assessing the value of your claims against your employer.
Most employees assume that if they have been terminated, laid off or downsized, they have no options other than to sign the severance offer or to seek traditional legal recourse against the former employer. In either case, the employee is giving up their rights and losing an opportunity to negotiate for a better deal.
It is imperative that you know the truth about your employment status from a legal standpoint. While you may think you are terminated without cause, your company may be claiming you left voluntarily or even that you were recently promoted. Likewise, your employer may have numerous obligations to you that extend far beyond the few weeks of severance pay they are offering. You simply cannot assess a severance offer or its value to you without knowing what you are entitled to from a legal standpoint – and most employers are more than happy to let an employee sign their right to that information away in exchange for a little extra severance pay.
Mistake #2: Overvaluing what you are legally entitled to from your former employer.
After terminating the employment relationship, an employer has certain duties under the law – some of which are contractual and some of which are statutory. Many employees understand that if they get fired, they have a right to two weeks per year of service as severance pay, but few employees know that employers also have a duty to pay out earned vacation pay and some other leave-related pay (i.e. sick leave) upon termination, and that most exemptions to this duty do not apply to employees making less than $100,000.
Mistake #3: Being unprepared for negotiations.
Almost all severance agreements arise out of negotiations – formal or informal – at the end of the employment relationship. Employees often enter into these negotiations with the company unprepared. Even where employees seek legal counsel prior to signing a severance agreement, they often do so knowing almost nothing about their situation and their legal rights. How can any attorney worth their salt effectively negotiate on behalf of an employee without an accurate understanding of their legal rights? It is no surprise therefore that employees often enter into these negotiations unprepared, and end up missing out on substantial sums of money as a result.

Importance of Legal Advice

When negotiating a severance agreement, employees under the age of 40 may lack familiarity with such agreements and will be less likely to understand the terms, and the consequences of signing them. Employers, on the other hand, will often have lawyers draft these severance agreements, and lawfully will be required to give you no more than 21 days to review it and sign it. I strongly advise getting legal advice before signing a severance agreement, and certainly before signing it while trying to negotiate terms. With 21 days to review and sign a severance agreement, there is little harm to asking a lawyer to review the agreement so you can make an informed decision. In addition, as discussed earlier in this article, some terms of the severance agreement will be negotiable , making it even more important to consult a lawyer for the correct strategy. Some legal considerations in being advised on a severance agreement might be the following: Of course, getting legal advice will cost money, but, in my opinion, it is worth the modest expense to get the right advice and information when dealing with an important financial settlement. While in context of a lawsuit, the Office of the Chief Justice of the Supreme Court of New South Wales noted that the private costs of litigation should often be on the basis that a party gets independent legal advice before any litigation is commenced, I argue that it also applies to settlements with employers, especially in the context of a potentially illegal contract, such as a non-disclosure agreement that is not limited to legitimate trade secrets.