Severance Agreements and Releases In Colorado
A severance agreement is a contract between an employer and an employee who is being terminated, laid off or otherwise let go. In a severance agreement, the employee may receive various benefits in exchange for waiving any legal rights or claims they may have against the employer. More simply, employees often sign severance agreements in Colorado to get more money or other forms of compensation in exchange for not suing their employer.
These contracts usually specify that the employee will not sue or file a legal claim against the employer in exchange for some form of compensation. These compensation can include money, severance pay, health benefits, stock options, retirement contributions and other employment benefits. Workers may also receive information regarding their eligibility for unemployment benefits in a severance agreement.
Both employers and employees should understand the terms and conditions of any severance agreement before they sign it. Most confidential release agreements limit the manner in which the separated worker can discuss their former employer , the reasons for their separation and the amount of compensation provided by the employer. These provisions are meant to protect the employer from negotiation in the future and prevent negative information about the company from leaking out to the public. Some separation agreements even include nondisparagement clauses that make it illegal for the former employee to speak poorly about the employer both while employed and after their dismissal.
Other components common to severance agreements include confidentiality clauses and noncompete clauses. Confidentiality clauses prohibit the employee from discussing or revealing confidential information about the company during their employment. They also extend to communications that occur after the employee has left the company. Noncompete clauses prevent the former employee from working for a competitor of the specific company. This can be a standard clause for employees who are privy to company trade secrets.
Colorado Law Surrounding Severance Agreements
In addressing "Understanding Colorado Severance Agreement Requirements," the legal requirements for severance agreements in Colorado are focused on statutory requirements, such as the provision of a specific amount of consideration to the former employee in exchange for their release of all claims against the employer. Colorado does not require additional factors for a severance agreement to be valid in the state; however, when seeking to enforce a severance agreement to release known and unknown claims, the United States Supreme Court’s decision in O’Sullivan v. Countrywide Home Loans has relevance in that it stated that a broad release for federal law claims is unenforceable unless the employee was specifically informed of any federal or state statutes to which the release applies.
Second, although the O’Sullivan standard is not binding in Colorado, it is widely followed by other federal courts, including the Tenth Circuit. Again, we don’t have a decision from a Colorado court on the enforceability of a broad release of federal law claims.
While the presumption is that releasing a known claim is legal, the Colorado ColoradoApprove.org decision held that it would approve a broad release of future claims even though, generally, a general release of unknown future claims is deemed to be invalid because there are public policy implications. The rationale is that while there may possibly be unknown future claims, it is contrary to public policy to create an incentive for claims to be discovered and further increase litigation. However, a release of known claims is valid, there is no judicial decision stating that it is non-binding.
Under the American Academy of Orthopaedic Surgeons v. Allstate Ins. Co., an arbitration agreement in which the parties agreed to waive all known and unknown claims is enforceable even though it called for waiving unknown claims.
Employers’ Rights and Obligations
As noted in a prior post, Colorado’s attorney general recently issued an opinion regarding the enforceability of restrictive covenants in Colorado. This opinion highlighted a number of Colorado law requirements (which are not typically found in most other jurisdictions) that must be satisfied for a restrictive covenant to be enforceable. These requirements include: (1) that the agreement be supported by independent legal consideration; (2) that the agreement be construed in favor of its validity to do so imposes an unreasonable restraint upon trade; (3) that the restricted period and domain be reasonably necessary; and (4) that the restriction be reasonable as it relates to the public interest. In this same opinion, the attorney general provided useful guidance about employee rights and protections under Colorado law, particularly when an employee signs a severance agreements. Colorado law (specifically § 24-34-402(1)(e)(I) of the Colorado Anti-Discrimination Act) provides that it is an unlawful practice for an employer to enter into an agreement with an individual regarding cessation of employment that has the purpose or effect of preventing him or her from thereafter making a truthful statement or declaration concerning the employer or its business. This universal restriction on reporting false or misleading information about an employer seems obvious, but it could have ramifications for employers who require employees to sign non-disparagement agreements at severance. As you will recall from our prior post, these types of agreements are appropriate if drafted properly.
Colorado law goes further, however, and explicitly prohibits a severance agreement from precluding an employee from filing a charge of discrimination or cooperating with an agency in connection with an investigation. Nor can a separation agreement preclude an employee from making truthful statements about his or her experience with the employer. So what does all of this mean for the language you use in your severance agreements? When including a non-disparagement provision in a separation agreement, make sure to state that nothing in the agreement will prevent the employee from participating in a proceeding before an agency or making statements regarding the violating entity or its policies, which are in compliance with FEHA and its implementing regulations.
Ten Most Common Mistakes
For Employers
The most common mistake employers make when offering severance benefits to former employees is forgetting that Colorado’s wage and hour laws require employers to issue final wage payments within certain statutory time frames. Colorado Revised Statutes section 8-4-109 requires that an employee who is discharged must receive any earned wages within 10 days of discharge. If an employee quits voluntarily, the employer must issue any earned wages no later than the next payday for involuntary resignations and no later than 45 days after the date of voluntary or quit/resignations. A failure to issue a final payment within the statutory period under Section 8-4-109 can result in the Department of Labor entering a stop-order requiring the employer to immediately pay the amount owed, the employee bringing a private civil action seeking double the amount owed, and/or the employer being assessed a fine of $100 per day of the violation, up to a maximum of $5,000, by the Director of the Division of Labor.
The second most common mistake employers make is requiring the employee to sign an overly broad release or waiver of rights that violates public policy. Generally speaking, an employer cannot prevail on an agreement that waives an employee’s rights for retaliatory discharge for filing a complaint with the Equal Employment Opportunity Commission (EEOC). Such a waiver flies in the face of Legislative intent – the very reason the statute exists. Likewise, such agreements cannot waive an employee’s right to file a claim with the EEOC. That right belongs to the EEOC as a private remedy of statutory employment discrimination in the form of a right of action for illegal discrimination; not to the employer. The same principle applies to any other rights that are in essence and fact "public rights" that the government has vested in the employee.
Other common mistakes include failing to identify or value potential claims that are not being released; incorrectly defining "claims" to include potential legal claims that don’t exist; failing to state the consideration that is being offered in exchange for the release; and failing to comply with statutory procedures for certain categories of employees, such as executives, managers and employees covered by collective bargaining agreements.
For Employees
The most common mistake employees make is to underestimate the time they have to consider a severance agreement. Colorado Law prohibits employees from waiving their rights to receive the appropriate amount of notice. A "reasonable" amount of time means consideration of no less than 21 days. Absent extenuating circumstances, such as age, disability or level of education, any waiver that occurs less than 21 days after the severance agreement was presented is a waiver that is subject to challenge. Employees also run the risk of signing or negotiating an agreement alone when the consequences of waiving the right to pursue a claim outweigh the benefits of the severance offer. Finally, employees are not providing the employer with "valuable consideration" when they simply sign a general waiver of claims, thus exposing the parties to the risks of a later challenge of the waiver’s validity.
Enforcing and Contesting Severance Agreements
A severance agreement made in Colorado may be enforced or challenged through existing statutory provisions, case law and courts. Importantly, considerations of good faith and fair dealing apply to violation of the agreement provisions. Negotiations of the agreement may dictate the outcome of enforcement and challenges in Colorado. These agreements in Colorado may be enforced under Colorado law to obtain compensation for breach of the agreement, injunctive relief and/or specific performance related to contractual obligations.
A potential challenge to a severance agreement might include contentions that the employment should not have terminated , the agreement may have been signed under duress, or the terms of the agreement were not met. A challenge may also be presented to an inducement to sign the agreement that was based on coercion or a misrepresentation. It is generally difficult to overturn an agreement in Colorado, but a provision obstructing appropriate disclosure of information in future work has been found to violate public policy. Legal proceedings in Colorado aim at substantive evaluation of the fairness of the severance agreement and may result in codification of proper rights and responsibilities.
Some Tips for Employers
Work with experienced employment law counsel when drafting, updating, and offering severance agreements. It is critical to work with someone experienced in this area of the law to ensure legal compliance. Provide more than legally required consideration. When employers anticipate an employee’s impending termination, even when the termination will occur in a non-discriminatory fashion, the employer may wish to give the employee some type of payment or benefit to allow the employee to find new employment. Offering an extra month or two of pay or continuing insurance benefits for a short period of time not only helps the departing employee but also helps the employer maintain good relationships with such employees and their remaining staff. Weigh severance agreement terms against statutory requirements and potential damages. Colorado law prohibits the payment of less than nine times the minimum wage for part-time employees and 12 times the minimum wage for full-time employees and requires that severance payments be made at least two weeks after separation. Therefore, in most circumstances, employers can offer the equivalent of these amounts without any problem. However, if the amounts exceed the statutory requirements, the extra amounts might be used to offset future statutory damages or claims, meaning that the extra amounts might not be paid to the employee. In cases where consideration will not be paid if an employee successfully brings a claim, amounts that would otherwise be due under Colorado Statutes should be carefully calculated and apportioned. Prepare severance agreements as needed based on the circumstances. A stand-alone severance agreement should be signed before the employment ends. Agreements with continuing obligations, such as non-competition agreements, should be prepared before the employment ends. Severance agreements are important even for employees who are voluntarily separating or retiring.
Consulting Lawyers
It is important to consult with a legal professional, particularly an employment lawyer who focuses solely on employment law, when contemplating the review, negotiation and/or drafting a severance agreement . An employment lawyer who specializes in employment law will be able to ensure that the severance agreement satisfies all legal requirements and is in the best interest of the parties.