It may seem strange to some dealerships to pay an employee to stop working for them, but severance has become a standard part of many employee exit plans. A severance package provides departing employees some degree of financial stability as they transition to their next job while giving the dealership legal protection against allegations of wrongful termination and other claims arising during the former employee’s time with the dealership. In addition, a severance agreement typically includes protocols for how the former employee and dealership will act going forward, such as by including confidentiality, non-disparagement and no re-hire provisions.
To be effective, a dealership must consider several factors when drafting compliant and enforceable severance agreements.
1. What Is a Reasonable Severance Amount?
There is no requirement to pay severance generally, and there is certainly no requirement as to the amount of severance a dealership must pay if it chooses to do so. Still, most employers tie severance to the employee’s position and tenure with the company. For example, a dealership may choose to pay two weeks of the employee’s average earnings per year of service. If the employee held a management or other key position, the dealership may choose to pay an additional amount. And, a dealership may modify its severance formula according to the reason for separation, such as whether for cause, reduction in force, voluntary resignation or retirement. The dealership must simply be able to provide a legitimate, business reason as to why one employee was offered a different severance package than another in order to defend against claims of discrimination or favoritism.
2. Can an Employee Sue the Dealership After Receiving Severance?
Most severance agreements include a general release precluding the former employee from suing the dealership over claims that may have arisen during the employee’s employment, including the separation itself. These releases must, however, include particular language. There are some claims that cannot be released in a private settlement, such as claims for unpaid wages under the Fair Labor Standards Act (FLSA). Likewise, other claims — such as those arising under the Age Discrimination in Employment Act (ADEA) and Older Workers Benefit Protection Act (OWBPA) — require a 21-day consideration period and a 7-day revocation period. Where the severance is being provided in connection with a group lay-off or exit incentive plan, the consideration period may be lengthened to 45 days. Dealerships should therefore consult with legal counsel when drafting release provisions.
3. Can Dealerships Require Confidentiality and Non‑Disparagement Provisions?
Historically, one of the primary incentives for dealerships to offer severance has been to gain the former employee’s cooperation and goodwill post-employment. As a result, most severance agreements include confidentiality provisions prohibiting employees from disclosing the details of the severance and other confidential dealership information to others, as well as non-disparagement provisions prohibiting the employee from unfairly criticizing the dealership to customers, co-workers, or vendors, whether in-person or on social media sites such as Glassdoor.
However, this year, the National Labor Relations Board (NLRB) issued a decision narrowing the scope of permissible confidentiality and non-disparagement provisions in severance agreements. The NLRB held that employees are entitled to, among other things, discuss terms and conditions of employment with others, even when doing so reflects negatively on the dealership. As a result, dealerships must be sure to narrowly tailor confidentiality and non-disparagement provisions so as to provide the dealership with the best protection available while not prohibiting employees from engaging in legally protected speech. Again, dealerships should consult with legal counsel before drafting such provisions.
4. What Happens if the Employee Breaches the Severance Agreement?
As with any agreement, dealerships must also consider what will happen in the event the employee does not live up to the promises contained in the severance package. It can be difficult to prove damages in the event of a breach — particularly with respect to confidentiality and non-disparagement provisions — which prompts some dealerships to include liquidated damages provisions setting forth the specific monetary amount an employee will owe per breach. Likewise, there is a disincentive for dealerships to pursue claims for breach where the cost of attorneys’ fees will outweigh the potential recovery; as a result, most severance agreements provide for payment of attorneys’ fees in the event of a breach. Finally, some dealerships prefer the practical, business-minded approach of an arbitrator when resolving disputes over severance, and therefore include arbitrations provisions in their agreements.
Finally, while severance agreements are often useful, they are not appropriate in every situation. For example, a dealership would not want to reward an employee’s misconduct by offering severance, nor would a dealership want to pay an employee for leaving to work with a competitor. In the event you have questions about whether severance is or is not appropriate — as well as what terms should or should not be included in a severance agreement — please contact legal counsel for guidance.
