Unraveling the Knots of Severance Agreements

In the wake of the roaring economic juggernaut, the severance agreement, a long-standing corporate mainstay, has quietly evolved from a simple ‘golden handshake’ to a complex, multifaceted instrument. Typically offered to employees upon their departure, these agreements have traditionally served to provide (a) financial cushioning in the form of severance pay and (b) corporate security from real and frivolous litigation.

Severance agreements have increasingly filtered down the corporate hierarchy, reaching even rank-and-file employees. The modern severance agreement is as likely to be offered to the mid-level manager as it is to the C-suite executive, often including a mix of financial compensation, continuation of benefits, and occasionally, outplacement services.

Simultaneously, we’ve seen a broadening in the scope of these agreements. They frequently include non-compete (extensions) and non-disparagement clauses, tying former employees to a web of legal obligations even after their tenure has ended. As many employees are discovering, these clauses can limit their future career opportunities, a reality that seems at odds with the initial generosity of a severance package.

In response, several states have taken action. California, North Dakota, and Oklahoma, for example, have imposed strict limitations on the enforcement of non-compete agreements, citing the detrimental impact on employees’ ability to find new employment. Still, the practice remains widespread in the rest of the Country or simply name it something else.

For example, in response to the reasonableness rule regularly being applied in the favor of employees, the growing trend in employment contracts and severance agreements is to name the restrictive covenant: non-solicitation. Trial courts having dealt with non-competition clauses for so long, are blindsided at preliminary injunctive hearings and have regularly ruled in favor of employers. This trend is unlikely to last. Simply put: if a non-solicitation agreement were different from a non-competition agreement, the non-solicitation agreement would be prohibited as a violation of antitrust law. The reality is, non-solicitation agreements are simply another form of restrictive covenant, and under Michigan law they are legal, provided they are also reasonable.

Severance agreements increasingly include language requiring departing employees to waive any potential legal claims against their employer, effectively silencing potential whistleblowers or litigants. This phenomenon took center stage in the pandemic era, where several high-profile cases revealed that severance agreements had been used to mask inappropriate behavior and workplace discrimination.

As we look to the future, the severance agreement stands at an intriguing crossroads. On one hand, they offer vital financial support for employees facing an uncertain future. On the other hand, they can suppress employees’ rights and limit their career mobility. It’s a delicate balance that the courts, lawmakers, and, most importantly, employers themselves will need to negotiate.

Indeed, the landscape of severance agreements reflects the ongoing evolution of the American workplace. They are, in essence, a mirror of the societal values we choose to uphold, and of the protections we believe employees should enjoy. As we witness the next chapter of the American work culture unfold, it’s a safe bet that the humble severance agreement will continue to play a pivotal role. How we choose to shape it, however, is a question that remains unanswered.