When an employee of a Washington business decides to leave or is fired, the employee may be offered a severance agreement (also known as a separation and release agreement). A severance agreement establishes the terms of the employee’s departure from the company and typically includes severance pay for the departing employee.
Note: Severance pay is not required in Washington State, but rather is a voluntary benefit provided by employers at their discretion.
The main reason severance agreements are appealing to departing employees is clear—additional compensation. But the reasons why employers use severance agreements are often more complex and varied. This post will look at a handful of the most common reasons employers use severance agreements.
The Employer Wants To Avoid Being Sued
Often the biggest reason for employers to use a separation agreement is to ensure they won’t be sued by a former employee.
When an employee leaves or is fired from a company, ill will often arises. And when a former employee feels unfairly treated, he or she may want to file a lawsuit in an effort to recover money or punish the company for perceived bad behavior.
Of course, the employer doesn’t want to be sued, and so it may offer the departing employee a severance payment in exchange for the employee signing a release of claims. This release effectively bars the departing employee from suing the employer.
The Employer Wants To Protect Its Proprietary Information
To protect proprietary information from disclosure to competitors, employers often have their employees enter into restrictive covenants, like non-compete and non-disclosure agreements. Ideally, employers should require their employees to sign these agreements before they begin working, as the offer of employment functions as the “consideration”—i.e., something of value—necessary to support these types of agreements. But employers (especially startups) sometimes neglect to have their employees enter these agreements on the front end.
When an employee leaves or is fired, it becomes paramount for companies with valuable proprietary information to ensure the information isn’t shared with a competitor. One common way to do this is to offer severance pay in exchange for an employee agreeing to restrictive covenants like non-competes and non-disclosures.
Related: Non-Compete Agreements In Washington State
An additional function of a non-disclosure clause in a severance agreement is to prevent the departing employee from disclosing the terms of the severance agreement itself. The employer may want to keep this information from being shared to avoid embarrassment or to keep existing employees from learning what a former co-worker was able to negotiate as severance pay.
Note: RCW 49.44.210 prohibits non-disclosure agreements that prevent disclosure of sexual assault or sexual harassment, unless the non-disclosure provision is contained within a settlement agreement between an employer and former employee.
Related: Non-Disclosure Agreements In Washington State
The Employer Wants To Protect Its Customers & Workforce
To survive, businesses need customers and workers. When an employee leaves or is fired, it’s possible that employee may try to poach customers and/or recruit workers, particularly if the departing employee is starting his or her own business. In some instances, this poses a serious threat to the employer.
One solution to prevent this from happening is to include a non-solicitation clause in a severance agreement. An employee non-solicitation clause expressly bars the departing employee from poaching customers and/or recruiting employees of the company to leave.
As with non-competes and non-disclosures, employers should really have non-solicitation clauses in place before an employee begins working, but for those that fail to do so, a severance agreement can provide a second bite at the apple.
Related: Non-Solicitation Agreements In Washington State
The Employer Wants To Protect Its Reputation
A disgruntled former employee, especially one who was fired, may have unpleasant things to say about their former employer. With the ubiquity of websites where consumers can review companies (e.g., Yelp) and where former employees may describe their experience working at a company (e.g., Glassdoor), it’s not hard for an employee to publish negative statements about a company to a potentially quite large audience.
Enter the non-disparagement clause. This clause prevents the departing employee from making negative statements about the company and establishes potential financial consequences for breaching the agreement. In some instances, the non-disparagement clause is made mutual, the effect of which is to prevent both the company and the departing employee from making negative statements about the other.
The Employer Wants To Ensure Ownership of IP Rights
In Washington, the creator of intellectual property, like a copyright or a patent, generally owns the IP rights, unless the creator is an employee who has assigned his or her rights to an employer. It should come as no surprise that employers want to keep control of valuable IP rights related to their business.
Hence, it’s a common (and best) practice for employers to require employees to agree to assign the rights to any IP they create during the time of their employment. While this is usually dealt with on the front end of employment, it may be necessary to deal with it as part of a separation agreement if no assignment agreement exists. In that case, the departing employee may have considerable leverage to negotiate a favorable severance.
Related: Who Owns An Employee’s Inventions In Washington State?
Severance agreements are not a one-size-fits-all type of contract. If you’re concerned enough about a departing employee to consider using a severance agreement, you’re probably aware of some exposure to risk, be it in the form of a lawsuit, loss of proprietary information, or reputational harm. A Washington employment attorney can help you tailor the terms of a separation and release agreement to protect your business from that risk.
For employees, it’s important to understand your leverage when you’re offered a severance package. For instance, if you have a potential claim against your employer (e.g., for wrongful termination), you may be in a position to negotiate a favorable severance, but if you take their first offer and release your claim, that’s all you’ll get. A Washington employment attorney can help you evaluate your negotiating strengths and weaknesses.