Updating Your Severance Agreements

When was the last time you reviewed and updated the severance agreements your business uses for departing employees?

Many of our clients rely on forms they have developed for various types of employment-related agreements, including severance agreements. While it is generally helpful to have a standard set of terms and provisions that has been previously vetted, those forms—over time—can fail to reflect developments and changes in the law or best practices. As a result, it is a good idea to take a fresh look at your forms from time to time and evaluate whether any revisions are necessary.

Below are a few points to consider as you review your form severance agreement.

Restraints on Protected Activity

Recently, several regulatory agencies have taken action against companies for including broad provisions in employment-related agreements that they viewed as improperly discouraging individuals from engaging in protected activity. The Equal Employment Opportunity Commission, the National Labor Relations Board and the Securities and Exchange Commission have initiated actions against employers based on provisions in severance agreements, such as releases, confidentiality agreements, covenants not to sue and nondisparagement restrictions, that could potentially be used to prohibit or discourage former employees from filing an administrative claim or charge arising from improper activity or cooperating with the agency’s investigations.¹  

To reduce the risk of a potential attack on a severance agreement by one of these regulatory agencies, companies should consider including a provision similar to the following: 

This agreement does not preclude Employee from engaging in protected activity under applicable law; filing a timely charge or complaint with or participating in or cooperating with an investigation or proceeding conducted by the EEOC, NLRB, or other agency; or exercising rights under Section 7 of the NLRA to engage in joint activity with others.

Based on the SEC’s expressed intention to protect whistleblowing activity, companies subject to that agency’s regulation may want to include language such as the following: “Further, nothing in this Agreement shall be construed to waive or limit your right to receive an award for information provided to the Securities Exchange Commission.”²  

Including the above language won’t necessarily immunize a company’s severance agreement from challenge by a regulatory agency, but it should significantly reduce that risk while maintaining the key elements of a severance agreement. It remains to be seen, of course, whether these agencies take a different approach with a new presidential administration.

Acknowledgement of No Proceedings and No Right to Individual Relief

While an employer should not restrict an employee’s ability to file an administrative charge or complaint for the reasons described above, it can have the employee acknowledge that he or she has not filed such a charge or proceeding (if this is in fact the case) and represent that he or she is not aware of any basis on which a charge or proceeding could be instituted against the company. Further, the agreement also can include an acknowledgment that employee is waiving rights to individual relief with respect to a regulatory charge or complaint unless otherwise prohibited by law. 

Adding or Revising a Noncompete Provision

If you are concerned that an employee could utilize confidential information or customer relationships to compete against your business, a severance agreement can provide a great opportunity to put in place noncompete restrictions that would apply after the termination of employment. Those restrictions, of course, will need to comply with the requirements under applicable law governing such restrictions.

Even if the employee already is subject to a non-compete provision, you should consider whether those restrictions should be revised or updated.  In particular, if your noncompete is dated, it may not take into account recent case law regarding the enforceability of noncompete and nonsolicitation restrictions. For example, recent decisions in North Carolina have emphasized scrutiny of the scope of activities that a noncompete restricts and the importance of limiting nonsolicitation provisions to customers with whom the employee actually had contact during the employment period.³

In addition to updating the form agreement, it is a good idea to make sure the noncompete is updated on an individual basis. For example, an employee’s position and responsibilities may have changed over time, especially for someone with a long tenure at the company. Likewise, the geographic territory in which an employee—such as a salesperson—currently works may be different from the area that is subject to the existing noncompete. As a result, you should review the noncompetition restrictions to ensure that they accurately reflect the employee’s position and job duties and effectively protect the company’s legitimate business interests. 

Adding or Revising a Confidentiality Provision

For many of the same reasons, you also should review your form agreement to determine whether it makes sense to add or revise a provision protecting the company’s confidential information and trade secrets. For example, it may be useful to enumerate specific categories of information that require protection in the confidentiality provision or to update such a list set forth in an existing provision. As discussed above, however, the agreement should include a provision confirming that the confidentiality provision is not intended to prevent the former employee from engaging in protected activity.

In short, rather than automatically turning to your form severance agreement this year, take a moment to review the agreement with counsel to evaluate whether the agreement is up-to-date with the law and adequately addresses the company’s interests. Even the best forms can use a tune-up after enough time passes. 

For assistance updating your form severance agreement, please contact a member of Robinson Bradshaw’s Employment and Labor Practice Group.

1. See, e.g., Equal Employment Opportunity Commission v. CVS Pharmacy, Inc. , Civil Action No. 1:14-cv-00863 (N.D. Ill.; filed Feb. 7, 2014) (challenging provisions in settlement agreement; ultimately dismissed on procedural grounds); Laff v. Quicken Loans, Case 28-CA-146517 (NLRB; March 17, 2016) (ALJ decision finding that broad confidentiality, return of company property and non-solicitation of employees provisions unlawfully restricted the exercise of rights under the NLRA).
2. See, e.g., Company Punished for Severance Agreements that Removed Financial Incentives for Whistleblowing, SEC Press Release dated Aug. 16, 2016 (https://www.sec.gov/news/pressrelease/2016-164.html).
3. See, e.g., Sandhills Home Care, LLC v. Companion Home Care-Unimed, Inc., 2016 NCBC 59, ¶21 (N.C. Bus. Ct. Aug. 1, 2016) (“Covenants that restrict an employee from working for in any capacity or providing services of any type to competitors, and are not restricted to prohibiting the employee from performing the same type of work or services, are unreasonable.”); Akzo Nobel Coatings, Inc. v. Rogers, 2011 NCBC 41, ¶ 50 (N.C. Bus. Ct. Nov. 3, 2011) (“Generally, covenants which seek to restrict a former employee from competing with future or prospective customers with whom they had no personal contact during employment fail as unnecessary to protect the legitimate business interests of the company.”).