For employees, the possibility of being fired or laid off is a terrifying proposition. The loss of employment brings with it the stress of figuring out how to pay for all of the necessary expenses that we face in life, whether it is food, car payments, phone, utilities, insurance, rent, or a mortgage. Some employees may be fortunate enough to be offered a severance agreement.
- What is a severance agreement?
A severance agreement is a contract entered into between the employer and employee in which the employer typically provides the employee with additional compensation in exchange for the employee’s release of any and all possible claims. In order for the severance agreement to be legally valid, some additional compensation is required.
- When will an employee be offered a severance agreement?
Certain employees – usually highly compensated ones – may be fortunate enough to have severance included in an employment contract at the beginning of employment or upon being promoted. However, usually, severance agreements may be offered when an employer is terminating the employee’s employment, either by firing, resignation, or lay off. Employers generally are not required to offer severance to employees unless it already was a term of an employment contract or unless it would result in discrimination to offer it to some employees and not others.
- Do you have to sign a severance agreement?
No. And any evidence that an employee was coerced into signing a severance agreement may make that severance agreement legally invalid. However, by not signing the employee will forego the additional compensation.
- Will your severance payment be taxed?
Yes – severance is considered to pay or wages and will be taxed. However, it may be taxed differently if paid in a lump sum (all at once) versus over a period of payments. If the severance payment is paid as a salary continuation, received weekly, the severance payment will be taxed more like a weekly paycheck.
- What is the deadline for you to sign a severance agreement?
If the employee is under age 40, then the Older Workers Benefit Protection Act amendments to the Age Discrimination in Employment Act (“ADEA”) do not apply. Accordingly, an employee under 40 may only have a day or so to accept a severance agreement. If the employee is at least 40 years old and the employer is subject to the ADEA, then the employee must have at least 21 days to consider the severance agreement and 7 days to revoke in order to properly release an ADEA claim.
Learn More about Severance Agreements
Seeking Legal Help?
If you are contemplating whether or not to sign a severance agreement, you should contact an employment law attorney. The attorney will determine whether or not it is in your best interest to enter into the severance agreement and whether there are any grounds to negotiate a better severance.
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