Severance Agreement – New Rule and What It Means for Staffing

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The world of employment, contracts, and salaries can be difficult to navigate. It seems as if every time we turn around, some new ruling or law has been put into effect, blowing the former constraints out of the water. Luckily, it’s often seen with good intentions in mind. Though the world of labor often seems one-sided, it’s anything but. With the power constantly being shifted between those with open jobs and those with labor to provide, it can become a tug of war, leading to benefits for both parties. When discussing the severance agreement, and its changes at the beginning of 2023, we notice the rope pulling in the direction of the employee.

For the love of balance and the necessity of parity, decisions have been made to better the future of workers.

On February 21, 2023, the National Labor Relations Board (NLRB) ruled that employers covered by the National Labor Relations Act violate Section 8(a)(1) of the Act by asking former employees to keep mum in order to receive said severance. The confidentiality agreement, often seen as a norm in the severance negotiation process, is now illegal. When laid off, workers will no longer be able to be hushed by their former employers.

But, how will the severance agreement affect employers and employees going forward? And, much to our enjoyment and interest, what is the history of these confidentiality situations?

As a staffing agency, we are experts on both labor acts and the processes that surround them. We have to follow modern legality to stay in business, like most employers around us. Therefore, we will break down the facts with colloquial ideals. Whether you are an employer with eyes toward future moves or a worker that’s facing a layoff, these rulings are crucial for your next steps.

But First… The News

Let’s continue with the NLRB ruling that sparked this topic.

In a less monotonous description, the ruling states that severing employers cannot silence laid-off employees in two specific ways. The board decided that these two hushing methods violate employees’ rights under sections 7 and 8(a)(1) of the aforementioned act.

The ways, surprisingly normal and once-accepted, involve keeping former employees quiet about company happenings in order to receive the severance they were promised. Overall, one of the methods included broadly written confidentiality clauses that required former employees to be silent about the terms of the severance agreement. The second was a broadly written non-disparagement clause that prohibited employees from discussing the terms of their former employment with third parties.

Pretty much: “We will give you severance pay, but you can’t discuss your time as an employee here or the terms of our severance package.

These new rules will roll out to most industries. For, the NLRB’s authority covers every U.S. business except railroads and airlines. This also covers all jobs, including those that are non-union.

Combatting Former Rulings

In the board’s decision, they wrote, “A severance agreement is unlawful if it precludes an employee from assisting coworkers with workplace issues concerning their employer, and from communicating with others, including a union, and the Board, about his employment.”

These rulings work as a reversal of those established during the Trump era. During the former President’s candidacy, the NLRB ruled that these laws were sound, allowing employers to govern what and when a former employee spoke through the dangling of severance pay.

The board went on to note that the non-disparagement clauses used by severing businesses are “sweepingly broad” and added that, “Public statements by employees about the workplace are central to the exercise of employee rights under the [National Labor Relations] Act.”

Point being: employees should be able to share concerning information that affects current and future employees regardless of the payments held in their way. Even if a company offers money, the employee should be able to report issues and unfair treatment. That’s the right of the employee as a protected worker with fair rights.

For example, an employee should be able to tell, say, a union that a business’ workplace practices are dangerous regardless of the severance package they received.

Oh, Musk. Not You, Again!

Twitter has kept itself in the limelight, being the driving force behind a plethora of workplace trends happening. Just at the end of last year, Twitter was one of the main forces behind the Layoff Contagion that struck the tech sector. The forced idea led to 964 tech companies laying off over 149,876 workers globally, with more happening. In fact, the contagion trend continues into June 2024.

*Cough. We wrote all about it here. Cough*

Ever heard of Elon Musk? The CEO of Tesla and the new owner of Twitter? The controversial and widely-adored entrepreneur with over 121 million Twitter followers?

After his $44 billion acquisition of Twitter toward the end of October, Musk decided to trim the workforce down by unfathomable amounts. The new CEO gave employees the ultimatum between extreme work and production or severance packages. He fired around 50% of the workforce with a forceful snap of his ‘clean’ fingers.

Not to mention, The New York Times reported that 1,200 full-time employees left ahead of Musk’s commitment deadline. So, with 50% fired and 1,200 leaving before Musk took control, Twitter’s workforce dropped from 7,500 to about 3,700 within the blink of the Tesla Giant’s eye.

The aforementioned severance packages may have been one of the catalysts behind the NLRB’s recent rulings.

According to prominent civil rights lawyer Lisa Bloom, who said she is representing about 100 former workers of Twitter, many of those laid-off employees are fighting back. The lawyer is putting together a case against the social media juggernaut regarding the severance agreement.

Bloom noted in an email to SFGATE, “Twitter’s severance agreement is illegal under this ruling because it mandated confidentiality, prohibited workers from helping others with cases against the company, and forever banned ex-employees from saying anything negative about Twitter or… Elon Musk.”

The first case that brought the former rulings to the NLRB’s attention was a hospital in Michigan that used a severance agreement to silence its former employees. The agreement banned them from disparaging the company and discussing their agreements. The hospital threatened them with not only redacting the severance pay but calling for financial penalties.

The changes act as an objective positive for employees, giving them the power to fight against unjust employers and still remain able to afford their living, especially in a current economic climate marred by inflation.

The History of Severance

“History is instructive. What it suggests to people is that even if they do little things, if they walk on the picket line, if they join a vigil, if they write a letter to their local newspaper… Anything they do, however small, becomes part of a much larger sort of flow of energy. And when enough people do enough things, however small they are, then change takes place.”

— Howard Zinn, American Historian 

Before concluding what the future holds for severance packages and how it will affect staffing, we must look toward the past.

Ultimately, severance pay is a package of benefits provided to employees by the former employer once they are laid off. To receive the package, the employee must fit a fair amount of restrictions set by the company (one of which being the non-disclosure agreements we are speaking of). If the requirements are met, the employee will receive pay for a period of time after employment.

The amount of money included in this payment depends on the agreement.

Amanda Gee, an HR coach at Paychex, told that employers typically provide one to two weeks of an employee’s pay for each year they’ve worked for the company. For example, an employee of five years who made $500 per week might receive between $2,500 and $5,000 in severance pay.

Legally, a business is not required to provide severance to laid-off employees. Oftentimes, the business provides it as a sign of good faith in the employee. An apology of sorts for having to let them go. For example, if an employee was laid off because of budget cuts, but was a fantastic employee, a company will often provide a package.

These packages can include a large lump sum or smaller payments (i.e. continuation of salary payments until the ending period).

Along with the United States, severance pay programs are often seen around the world.

Back In My Day

Because of the simplicity of its nature, severance pay cannot be tracked back to a point of origin. The idea of paying a former employee for their work as a thank you is both human and empathetic. To think that this concept only started in, say, the 19th century would be both naive and negative. The idea probably stretches back to the concept of employment itself, at least a little.

Regarding legality in the United States, we can place the genesis of legal severance packages to around the mid-20th century. The NLRB, which ultimately governs the rulings behind severance-type ideas, was established in 1935. Furthermore, it’s important to note the furthering of welfare post World War II.

Going off the Social Security Act created in 1935, Small formula grants for the states were authorized in relation to maternal and child health, disabled children, child welfare, and medical assistance for older people. A fourth program of public assistance, Aid to the Disabled, was added in 1950.

It would be around this time that the idea of providing financial assistance for all that needed it (unemployed included) would be at the forefront of country-wide thought. Therefore, it’s natural to assume this is when severance packages became a part of white-collar professionalism.

Excerpt from,
Severance pay programs around the world: History, rationale, status, and reforms
by Holzmann, Robert; Pouget, Yann; Vodopivec, Milan; Weber, Michael

The available literature on this topic suggests three main historical determinants of severance mandates across the world: (i) the creation of broader labor codes, (ii) early industrial restructuring and spells of high-level unemployment in the interwar period, and (iii) the expansion of the welfare state after WW II. These determinants are at times intermingled with two main reasons why firms choose to voluntarily provide severances pay: one-off payments during industrial restructuring to allow for quick action and to avoid political fall-out, and seniority-related payments – corporate pensions and severance – that balance the interest of firms and workers in knowledge intensive firms.

For developing countries, these historic events may not have had the same significance. Legislation in these countries seems to have arisen by copying of the colonial powers’ labor codes and social security systems.

Are Employers Legally Obligated to Create a Severance Agreement?

At this point, you may be surrounded by popping questions. If there are so many laws and rules around the ordinances of severance packages, are they legally required for employers to provide? Is there a situation (i.e. length of employment) where a former workplace must provide payment to a laid-off worker?

The beauty and name of our country surround the individualism of the states. As does the rules of severance.

There is no requirement under the Fair Labor Standards Act or other federal law mandating that employers provide severance packages. Though, if an employer fails to provide proper notice to terminated employees under the Worker Adjustment and Retraining Notification Act of 1988, they may be required to extend severance pay.

In the midst of the economic struggle that was the 2020 COVID-19 shutdown, New Jersey became the first state to require severance pay regardless of the lay-off notice timeframe. In the state, employers that give terminated employees at least 60 days’ notice must pay one week of severance per year of service, while those that fail to give advance notice must pay four weeks’ severance pay.

When Are Severance Packages Negotiated?

Oftentimes, a severance package is offered when the employee is alerted that they will be terminated. At this point, the employee can sign the agreement or attempt to negotiate for different package pieces.

If you are an employee and are offered a severance plan, see if there is room to negotiate. If possible, ask for extended health insurance and payment based on your experience and position. For example, severance pay is often one or two weeks per year of employment. Therefore, if you’ve worked for ten years, you should be receiving one or two weeks’ pay multiplied by ten.

Sometimes these amounts are set in stone, but you can always see if wiggle room is possible. If you are being offered payment, the company obviously wants to stay on good terms with you. You have some leverage.

Furthermore, check with your employer about other forms of payment like accrued holiday pay, personal days, commission, and sick time. Get all of these payments if you can. If you do not take advantage of them, they will disappear. That’s money left on the table that is legally owed to you.

If you are an employer, work within the bounds that your finances provide. As noted, it’s not a legal obligation. It’s an act of respect and thanks. If you cannot afford to meet the demands of the negotiating employee, let them know that the offer stands firm. If you want to negotiate and have the means to do so, that’s entirely up to you.

Though negotiation is possible, it’s not often seen as a major part of the severance agreement process.

Should an Employer Have Severance Plans in Place?

Though legality doesn’t require employers to provide severance, it’s often something discussed amongst bigger workplaces. If you believe that it’s worth its weight in gold, it may be best to have a severance plan laid out prior to laying off any worker. With an already laid-out plan, you also reduce the need for negotiation. You can refer to the established plan as a hard and fast ruling, leaving no room for employee discussion.

Creating an end-all, be-all severance agreement comes with some pitfalls, though. Each severance situation is entirely unique, calling for a flexible package that can be both adjusted and revoked.

Amanda Gee, an HR coach at Paychex, told, “If [an employer] is going to put together a policy that they offer severance to all employees, they have to be cautious that they’re not using discriminatory factors or appearing inconsistent,” she said. “If the company makes the decision to offer all employees severance packages, that’s fine… but they have to make sure they’re not violating any laws by selecting who they apply severance to.”

Henceforth, a broad severance idea may be discussed amongst company decision-makers, but shouldn’t be outright drafted until the situation arises. You can ultimately decide that you will provide severance packages and set an amount or time-money parameter, but leave the actual contractual drafting until around the time of termination discussion. This way, you can make sure that it adheres to the ever-changing situation of both the law and modern business.

For example, if you had a long-standing severance package drafted that included a
non-disclosure agreement, it would now be considered illegal.

What Does This Mean for the Future?

Ultimately, not much.

Despite decisions made in New Jersey, the idea of severance remains virtually the same across the nation. Now, the only difference is that of confidentiality.

Bias aside, the new ruling only strikes negativity amongst businesses that were using infamous methods to protect unflattering working conditions or rumors. If a company has nothing to hide about the way they treat their workers, they shouldn’t have to worry about disclosure agreements in their severance packages, anyway. It’s as simple as that.

This begs the question: what about industry secrets or business production details?

And that question would be rightfully asked by those not aware of usual practices. It’s important to keep business secrets, especially amongst disgruntled employees when they are laid off. Someone turning from an employee to an upset former worker willing to sell information isn’t a huge logical leap.

Oftentimes, confidentiality regarding trade secrets or other production information is established and signed during the hiring process and limits a worker even outside of employment. For example, a worker will sign an NDA on the matter when hired and the NDA will note something like ‘the individual cannot work at a direct competitor for 3 years after separation of employment’. Or something to that effect.

Logistics aside, important NDAs involving business and trades are usually formulated at the start of employment, not in the severance package. Therefore, the new NLRB doesn’t and shouldn’t affect that situation.

When discussing all of these options and pathways (for both employers and employees), it’s important to note the complexity and importance of that John Handcock.

If you feel like something is illegal about the way in which you were laid off, check with an attorney before signing any paperwork (especially severance waivers).

While they may not be in the wrong, you should still check into it. If you were the only person laid off, were laid off after making a complaint, or any other suspicious circumstances, call a lawyer.

Most states are at-will states, meaning employers can fire workers for any reason, but there are still illegal reasons to be fired. Check into your local laws if you feel something is awry or wrong.

Will Other Changes Be Made?

“Today’s decision, in contrast, explains that simply offering employees a severance agreement that requires them to broadly give up their rights…[and] that the employer’s offer is itself an attempt to deter employees from exercising their statutory rights, at a time when employees may feel they must give up their rights in order to get the benefits provided in the agreement,” the NLRB’s ruling said.

Are other parts of the National Labor Relations Act up for discussion or change? Not at this moment, though they certainly could be in the future.

We are facing trying times with a possible recession looming from beyond and a labor shortage blistering some industries. Everything and anything can change in the near future. If you were to say things would be in the state that they are in 2019, we’d all laugh. Right?

Regardless, Tier2Tek Staffing will always be here to keep you updated on the changes (and history) of labor-based information. Keep an eye on our blog, for we are always providing useful information to both employers and employees.