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Those Old Severance Agreements May Come Back to Haunt You

Whenever I draft a severance agreement for a client, I always caution them that “one size does not fit all.” A severance agreement intended for a 25-year-old receptionist in Texas who is always late to work is unlikely to be appropriate for a 65-year-old engineer in California being terminated as part of a larger reduction-in-force. Most seasoned human resource managers understand this. However, even when the circumstances of a termination are virtually identical (same jurisdiction, rationale, circumstances, and demographics), employers should not assume that they only need to change out the names from an agreement their labor counsel prepared a few months ago.

For example, many severance agreements have included provisions in which terminated employees agreed that they would not “communicate or divulge Confidential Information or Trade Secrets without the prior written consent of the Company.” Who could take issue with such language? In August, the Securities and Exchange Commission did when it assessed a $265,000.00 penalty against an employer that had included such a provision in its severance agreements, contending that the requirement created an impediment to whistleblowing in violation of SEC Rule 21F-17. 

Six days later, the SEC assessed a $340,000.00 penalty against a second employer that had required employees to waive any right to “any individual monetary recovery” in any proceeding brought based on any communication by the employee to any federal, state or local government agency or department, even though the agreement had made it clear that the employee could still file a charge and participate in any such proceeding.

I would understand it if some companies are less inclined to shell out large severance payments because these developments could leave open the possibility of an ex-employee being entitled to an additional sum of money from the government later on. But regardless of where a company stands on the pros and cons of providing severance pay, it should carefully review its severance agreements in light of these decisions, especially if it is publicly traded.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.