A Guide for Michigan Employees

Navigating the end of an employment relationship can be challenging for any worker. Whether you're facing a layoff, resignation, or voluntary termination, understanding your rights and responsibilities in the process is crucial. One key aspect of these transitions is the severance or separation agreement—legal documents that outline the terms and conditions of your departure from an employer. For employees in Michigan, knowing how to navigate these agreements can have a significant impact on your financial future, career prospects, and legal rights.

Severance and separation agreements can be complex and come with a range of terms that may affect your long-term interests. These agreements are meant to provide clarity for both employers and employees, but without a clear understanding of the language and provisions, workers might unknowingly forfeit important rights. Whether you are offered a severance package or are negotiating your separation terms, it's essential to fully grasp the agreement before signing.

What is a Severance and Separation Agreement?

Severance Agreement

A severance agreement is a contract typically offered by an employer when an employee is laid off, terminated, or otherwise let go from their position. This type of agreement outlines the terms under which the employee will leave the company and provides compensation or benefits during their transition.

The severance agreement usually includes:

• Severance Pay: A lump sum or continuation of salary that is provided to the employee after their termination. This is often based on the employee’s tenure at the company (e.g., one week of pay for each year of service).
• Benefits Continuation: Many severance agreements include provisions for continued health insurance or other benefits for a specified period of time, which can help ease the financial burden during the employee’s job search.
• Non-Disclosure Agreement (NDA): A provision that may require the employee to keep certain company information confidential, even after leaving the organization.
• Non-Compete and Non-Solicitation Clauses: Employers may include restrictions on the employee's ability to work for competitors or solicit clients or employees for a specified period after the termination. These clauses can have long-term consequences for employees, potentially limiting future career options.

Separation Agreement

A separation agreement is a broader term used to describe any agreement between an employer and an employee related to the end of the employment relationship. It can be used in various circumstances, such as:

• Termination: When an employer decides to end an employee's job.
• Resignation: When an employee voluntarily leaves their job.
• Retirement: When an employee is transitioning into retirement from their position.

The key distinction between a severance agreement and a separation agreement is that a separation agreement may not always offer severance pay. It often focuses on the terms and conditions surrounding the departure, such as how the separation will be handled and whether any compensation or benefits will be provided post-departure. A separation agreement may also include other legal protections for both parties, such as a mutual release of claims to prevent any future lawsuits between the employee and the employer.

Key Terms and Conditions in Severance and Separation Agreements

Severance Pay

Severance pay is typically a key component of a severance agreement. It is financial compensation that is provided to an employee when they are laid off, terminated, or otherwise separated from their employer. The pay is often calculated based on the length of employment, the employee’s role, and the company’s severance policy. For example, an employer may offer one week of pay for each year of service. In some cases, severance pay can be negotiated, especially if the employee has been with the company for a long period or is in a high-level position.

Severance pay is usually paid as a lump sum, but in some instances, it may be provided as continued salary for a period of time after separation. If severance pay is not included in the initial agreement, employees may still be able to negotiate or pursue it based on their contract or the employer’s policies.

Non-Compete and Non-Solicitation Clauses

Non-compete and non-solicitation clauses are provisions often included in severance and separation agreements, especially for employees in higher-level positions. Here’s what these terms mean:

• Non-Compete Clause: This clause restricts the employee from working for a direct competitor or starting a competing business for a specified period after leaving the company. The non-compete clause will usually define a geographic area and time period during which the employee cannot engage in such activities. These clauses are meant to protect a company’s trade secrets and proprietary information but can severely limit future employment options. It’s important for employees to understand the scope of the non-compete before signing.
• Non-Solicitation Clause: This clause prohibits the employee from soliciting the company’s clients, customers, or other employees for a set period after leaving. While less restrictive than non-compete clauses, non-solicitation clauses can still affect future career opportunities, especially if the employee is looking to work in a related field or hire former colleagues.

Release of Claims

One of the most significant provisions in a severance or separation agreement is the release of claims clause. This clause typically requires the employee to waive their right to pursue legal action against the employer in the future. By signing the agreement, the employee agrees not to file lawsuits for wrongful termination, discrimination, harassment, or any other claims that may arise from the employment relationship.

While the release of claims is often a standard part of severance agreements, employees should be cautious before agreeing to waive any rights. It’s important to understand that signing this clause is typically voluntary, but it may also be a condition for receiving severance pay or other benefits. Employees should consult with an attorney to ensure they are not forfeiting important legal rights, especially if they feel they have been wronged by the employer.

Confidentiality and Non-Disclosure

Many severance and separation agreements include confidentiality and non-disclosure provisions. These clauses restrict the employee from discussing sensitive company information, trade secrets, or the terms of the agreement itself. The confidentiality clause is meant to protect the company’s intellectual property and business practices.

The non-disclosure provision may also prevent the employee from discussing the details of their termination, severance pay, or other aspects of the agreement with third parties. While these clauses are common, employees should be aware of their scope and how they may affect their ability to speak freely about their experience. Violating confidentiality clauses can result in legal consequences, so it’s essential to understand the restrictions before agreeing to them.

Health Benefits and COBRA

For many employees, the continuation of health benefits is a critical part of a severance or separation agreement. If an employee loses their job, they may be at risk of losing their health insurance coverage. Under federal law, employees who lose their job and are eligible for COBRA (Consolidated Omnibus Budget Reconciliation Act) can continue their health insurance coverage for a limited time, usually up to 18 months.

The severance or separation agreement will often specify whether the employer will pay for continued coverage or if the employee will be responsible for the premiums. Employees should carefully review these provisions to understand the cost and duration of their health coverage under COBRA. If the employer does not offer this continuation of benefits, the employee may need to explore alternative insurance options.

Outplacement Services or Job Assistance

Some employers may offer outplacement services or job search assistance as part of a severance or separation agreement. These services can include resume writing assistance, career counseling, job placement resources, and interview coaching. Outplacement services are designed to help employees transition to new employment more quickly and effectively.

While not always included in severance agreements, outplacement services can be a valuable benefit for employees, especially those who have been with the company for a long time or are facing challenges in finding new employment. Employees should inquire about these services if they are not mentioned in the initial agreement.

Legal Considerations for Michigan Employees

Michigan Employment Law

Michigan is an at-will employment state, meaning that employers and employees can generally terminate the employment relationship at any time, for any reason, or for no reason at all, as long as it’s not discriminatory or in violation of an employment contract. This gives employers flexibility but also means that employees do not have guaranteed job security unless they have an employment contract specifying otherwise.

Federal Law

Under the Older Workers Benefit Protection Act (OWBPA), which is an amendment to the Age Discrimination in Employment Act (ADEA), employers must follow certain guidelines when offering severance or separation agreements to employees who are 40 years of age or older. The law requires that:

• The employee must be given a clear and understandable explanation of the terms of the agreement.
• The employee must have a reasonable amount of time to review the agreement (usually at least 21 days), and if multiple employees are involved, they are granted 45 days.
• Employees must be informed of their right to consult with an attorney before signing the agreement.

Time to Review

One of the most significant mistakes employees can make when offered a severance or separation agreement is signing it immediately. It’s critical to take the time to review the document thoroughly and ensure that the terms are fair and reasonable. Employees have a legal right to review the agreement, and in many cases, they may be entitled to several days or weeks to consider the offer.

Negotiating Terms

While many severance or separation agreements are presented as "take it or leave it" offers, employees may have room to negotiate the terms. Common negotiation points include:

• Severance pay: If the offer seems inadequate, employees may be able to negotiate for a larger lump sum or continued salary.
• Health benefits: Employees can ask for an extension of health benefits or a larger severance package to help cover the costs of COBRA.
• Non-compete and non-solicitation clauses: These clauses may be negotiable, especially if they are overly restrictive or could harm future employment opportunities.
• Job assistance: Employees can inquire about additional career support, such as job placement services or resume assistance.

Tax Implications

Severance pay, like regular income, is subject to taxation. However, severance pay can sometimes be taxed at a higher rate because it is considered a lump-sum payment. The tax treatment depends on whether the payment is considered supplemental wages (e.g., severance pay, bonuses), and the federal government may impose a flat withholding rate of 22% for these payments. State and local taxes may also apply.

Conclusion

Severance and separation agreements are critical components of an employee’s exit from the workforce, whether due to layoffs, retirement, or other employment changes. It is essential for Michigan employees to fully understand the terms and conditions of these agreements to safeguard their financial future and legal rights. Key points to remember include the distinction between severance and separation agreements, the various clauses they may contain, and the legal protections available under both state and federal law, such as the Older Workers Benefit Protection Act and the rights provided under Michigan’s at-will employment laws.

Given the complexities and potential long-term consequences, seeking legal guidance before signing any severance or separation agreement is a wise and prudent step. Legal experts can help clarify confusing terms, ensure that employees’ rights are protected, and guide them through the negotiation process to secure the best possible outcome.

If you find yourself facing a severance or separation agreement, don’t hesitate to consult with an experienced attorney. Marko Law offers expert legal services to Michigan employees who need guidance and support when reviewing or negotiating employment agreements.

Contact Marko Law

220 W. Congress, 4th Floor
Detroit, MI 48226
Phone: 1-833-MARKO-LAW | +13137777777