What At-Will Employees Should Know About Severance Agreements

Severance agreements are contracts that set the terms of an employee’s departure from a company. They are very important for at-will employees, who can be terminated by their employer at any time, with or without cause. A severance agreement provides financial compensation but also establishes conditions that the employee must adhere to, some of which can be strict and even onerous.

Severance agreements often contain restrictions that aim to protect the interests of the employer after the employee leaves the company. Some of the most common restrictions are:

1. Non-disclosure agreements (NDAs) — These prohibit a former employee from disclosing trade secrets or proprietary knowledge learned during their employment which, if disclosed to a third party or made public, could harm the business. However, NDAs are sometimes overbroad in scope, covering subjects that do not actually implicate the company’s economic interests. They can also improperly seek to prevent disclosure of illegal conduct.
2. Non-compete clauses — This is a restriction against a former employee working for or starting up a similar business to the employer’s within a specified geographical area for a certain time. It is meant to protect a company’s customer and vendor relationships. However, to be enforceable it must be reasonable in scope, duration and geographic reach. It should apply to managers and other higher level employees, not to hourly wage earners.
3. Non-solicitation clauses — A non-solicitation agreement prevents the former employee from contacting the company’s customers, clients, or employees to solicit business or employment. This provision is designed to safeguard client relationships and prevent employees from taking valuable resources when they leave the company.

A severance agreement typically will specify remedies for violations of its restrictions. One common provision is a liquidated damages clause, which includes a pre-set amount the employee must pay if he or she breaches the agreement. Liquidated damages are meant to compensate the employer for losses that would be difficult to quantify. However, if the damages amount is unduly large under the circumstances, it may be considered an unlawful penalty. In New Jersey, these clauses are enforceable only if the damages amount is reasonable in light of the anticipated harm caused by a breach. That is, the amount must be proportional to the actual injury that the employer might suffer.

A severance agreement often includes a general release and waiver, which means the employee agrees not to sue the employer for any legal claims they might have. It can also include a clause that requires all disputes arising under the agreement to go to arbitration, with the employer choosing the forum.

If a terminated employee is asked to sign a severance agreement, they should carefully read all the terms, including the restrictions, penalties and waivers of rights. Before signing, it is wise to consult with an employment attorney, who can determine whether the agreement is fair and enforceable under state law. If certain provisions seem overly restrictive or unfavorable, there may be room to negotiate. 

Deutsch Atkins & Kleinfeldt, P.C. is experienced in negotiating severance packages and other aspects of employee compensation. Based in Hackensack, we serve clients throughout North Jersey and the New York metropolitan area. Call us at 551-245-8894 or contact us online to arrange a consultation.