Red flags to watch for in settlement/severance agreements


You’ve recently decided that you’re going to leave your job (perhaps you also filed a discrimination or retaliation complaint against your employer) and now the company wants you to sign a settlement or severance agreement. In exchange for signing this agreement, you will receive a payment, but also give up your right to pursue legal action against the company (among other things).

At this stage, it is important to read the settlement agreement carefully and, if possible, get advice from an experienced employment discrimination lawyer as several provisions in the agreement may come back to haunt you. A few of these potential red flags include:

What Claims Are You Giving Up By Settling?

One of the trickier parts of a settlement/severance agreement has to do with the scope of legal claims that you agree to waive by signing the agreement. If, for example, you have a gender discrimination claim related to your company denying you a promotion to Senior Vice President in 2016, then you will of course be abandoning this claim as part of the agreement. But your employer will almost certainly want you to also agree to waive any employment discrimination claims you had as of the day you sign the settlement agreement. You should not, however, be required to waive any future claims related to your employment. So, for example, if you were again discriminated against in 2020 after you signed the agreement, you should not have to waive this subsequent claim as well.

Likewise, certain statutory rights exist, such as assisting a government agency (like the EEOC or the Department of Labor) in its investigation of the employer, which cannot be waived.

Confidentiality And Non-Disparagement Clauses

executive employment law; Bachman Law; Eric BachmanAs with many things, the devil is in the details with confidentiality and non-disparagement clauses. You may want to require these provisions to be mutual so that the company cannot disparage you and/or talk about the terms of the settlement (what’s good for the goose is good for the gander).

Also, it’s important that these provisions do not unreasonably restrict your ability to assist with a government investigation of wrongdoing by your employer.

Non-compete and non-solicitation clauses

You may have agreed to a non-compete or non-solicitation restriction earlier in your employment or the employer may include it in the severance agreement. It is imperative that you understand your rights and responsibilities under the specific language you agreed to as this can have a major impact on your ability to find a new job. Accordingly, this should factor into the payment amount you receive under the settlement/severance.

Disputes about the settlement agreement and penalty provisions

What happens if one party believes the other party breached the settlement agreement six months after you signed it? Make sure you understand what will happen in this scenario. For example, will you be required to receive notice of the purported breach and be given an opportunity to cure it? Can you sue your employer in court over the alleged breach or will the dispute be subject to arbitration or mediation instead? You’ll also want to know who chooses the arbitrator and pays for them.

Similarly, if your employer claims you breached the settlement agreement, is there a penalty provision that may apply? That is, will you be required to pay back a portion of the settlement/severance? Again, you may want negotiate to make sure that any penalty provision also applies to the employer if it breaches the agreement.

When you receive your money and tax consequences

The agreement should spell out precisely when you will receive your payment and how you will receive it (check, wire transfer, etc.).

In addition, if you are settling potential legal claims as part of the agreement, you should consider whether all of the settlement payment should be treated as Form W-2 wages (subject to taxes and withholdings). Occasionally, you may want to characterize some of the payment as compensatory/emotional distress damages, which can be treated differently than wages and are reported on a Form 1099.

Each case is unique, as is each employer, so make sure you understand what your rights and responsibilities are before you sign your settlement/severance agreement. Otherwise, the assurances of ending your employment (and any legal claims) smoothly and with finality may not be worth the paper they’re written on.

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