Settlement and Severance Agreements: My employer is giving me money in exchange for my soul

Perhaps you resigned or were terminated or laid-off. On the other hand, you may have sued your employer for discrimination or some other sort of unlawful action. Either way, one of those events caused your employer to offer you a settlement or severance agreement. In exchange for signing the agreement, you will receive a payment, but also give up your right to pursue legal action against your employer, among other things.

If you are presented with a settlement or severance agreement, it is imperative that you read the agreement carefully and, if possible, get advice from an experienced Dallas Employment Lawyer. Typically, you will be allotted 21 days to review and sign the agreement, which provides you ample time to consult with an attorney. Oftentimes, companies sneak many clauses in the agreement that may come back to haunt you. Hence, consulting with an experienced employment lawyer is important.

Here is what you can expect to see in a settlement or severance agreement and red flags you should hire an attorney to help you avoid:

Release of Claims      

Nearly all settlement or severance agreements require you to agree to a “general release of known and unknown claims.” In other words, by signing the agreement, you agree to waive any and all claims you may have against your employer as of the day you sign the agreement. You should not, however, be required to waive future claims. So, for example, if once you sign the agreement the company breaches its obligation to you under the agreement, you do not waive your right to sue the company for that breach. If, however, you find out after you sign the agreement that while you were employed by the company you were being discriminated against, you cannot sue the company for the discrimination. This is due to the fact that you waived your right to sue the company for any and all claims that would have occurred prior to the date you signed the agreement. This is true even if you find out about the claim after you sign the agreement.

Likewise, no severance or settlement agreement may require you to waive your right to assist a government agency, such as the EEOC, NLRB, or OSHA, in its investigation of the employer. Additionally, no severance or settlement agreement may require you to waive your right to apply for unemployment benefits through the Texas Workforce Commission.

Confidentiality & Non-Disparagement

Almost all severance or settlement agreements include confidentiality and non-disparagement clauses. A confidentiality clause merely requires that you keep the existence of the agreement and the payment you received confidential. A non-disparagement clause requires that you refrain from disparaging the company, whether orally or in writing.

Non-Compete and Non-Solicitation Clauses

You may have agreed to a non-compete or non-solicitation restriction earlier in your employment with the company. If so, those restrictions will carry over into your settlement or severance agreement. However, If you did not agree to such restrictions, your employer may still try to sneak the restrictions into your settlement or severance agreement. It is imperative that you understand your rights and responsibilities under the specific language of these clauses as this can have a major impact on your ability to find a new job. Accordingly, this should factor into the payment amount you receive under the settlement or severance agreement.

When you receive your money and tax consequences

The agreement should spell out precisely when you will receive your payment and how you will receive it (check, direct deposit, etc.). Most, if not all, employment related settlement payments should be treated as Form W-2 Wages (subject to taxes and withholdings). Employment related severance or settlement payments are rarely reported on a Form 1099. In fact, it is in your best interest to report a settlement or severance payment on a Form W-2 as that will decrease your FICA tax liability, forcing your employer to pay half of the FICA tax.

Employment Reference

Most severance and settlement agreements are silent as to what sort of employment reference a company can give out to prospective employers. You do not want to be in a situation where you sued your employer for an illegal action, settled your claims against your employer, were paid money in exchange for a release of your claims, but your employer then went on to bad mouth you to prospective employers. Therefore, at the very least, you want to include language in the severance or settlement agreement enumerating what information, if any, your employer can give out to prospective employers and who prospective employers should contact within the company for a reference. In nearly every circumstance, I negotiate the inclusion of a neutral reference clause in a settlement or severance agreement. A neutral reference only permits your employer to disclose your dates of employment and last held position within the company to any prospective employer.

Each case is unique, as is each employer, so make sure you understand what your rights and responsibilities are before you sign your settlement or severance agreement. Take advantage of the opportunity to consult with a Dallas Employment Lawyer before signing a severance or settlement agreement. My office spends a lot of our time analyzing settlement and severance agreements, negotiating the terms of said agreements, and ensuring that our clients are signing fairly negotiated agreements. Call us today for a review of your settlement or severance agreement. One hour with us can give you peace of mind for years to come.

Similarly, if you are beginning a new job and have an employment contract that you must sign, call us for a review of the contract before signing it. An early review of an employment contract can help you avoid legal issues in the future.

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