Ninety-nine percent of all severance agreements will contain a confidentiality clause. While severance agreements, at their essence, are an exchange of money in return for a promise not to sue the employer, the employee will often have to agree to other substantive requirements as well, including confidentiality.
Why do employers want confidentiality?
Before explaining what confidentiality actually means in the context of a severance agreement, it is important to understand why confidentiality is viewed as important by the employer. The inherent value of severance agreements from the employer’s view is to buy the peace and quiet between the former employer and employee, to prevent lawsuits before they can ever start, and to keep legal costs predictable and as low as possible for the employer.
However, if an employee is legally allowed to tell other current employees that the employer offers severance agreements, or that generous severance payments are paid, additional legal claims from other employees could be encouraged. In other words, employers are fearful that other employees would smell “blood in the water” and leverage this against the employer in response to their own future terminations.
What do confidentiality agreements usually say?
Confidentiality provisions typically state that the employee (but not the employer) is prohibited from disclosing 1) the terms, including the amount of the severance agreement, and/or 2) the sheer existence of the severance agreement to others. Depending on the exact language, this means that the employee is legally barred from even telling others that a severance agreement exists, let alone the specific amount that was paid by the employer. Again, employers do not want other employees to believe that severance agreements are readily offered because this creates a sense of legal entitlement and could make future severance packages more expensive for the employer.
Are there any exceptions to confidentiality?
Confidentiality provisions are typically subject to a short list of exceptions, including certain people that may be told about the amount and/or existence of the severance agreement or specific circumstances where confidentiality does not apply.
Most, if not all, confidentiality provisions will state that the employee may disclose the nature and existence of the severance agreement to the employee’s attorney, CPA, or financial advisor. This is necessary because the severance agreement itself will often state that the employee is encouraged to speak with an attorney before signing it; a tactic employers use to make the severance agreement enforceable if it is later challenged. Next, some, but not all, confidentiality provisions will state that the employee may disclose the severance agreement to immediate family members, such as spouses and children.
Importantly, many confidentiality clauses will state that even if the disclosure of the agreement’s terms to certain people is allowed, those additional people are also bound by the agreement’s confidentiality provision, and that if those additional persons breach confidentiality the employee bears the consequences. This means that family members that are allowed to know about the severance agreement must treat confidentiality as seriously as the employee herself. If not, the employee can be penalized or sued for breach.
Lastly, disclosure of the severance agreement’s existence and terms to certain government entities is another common “carve out” to confidentiality clauses. These will often include the California Employment Development Department (“EDD”) or government entities in charge of collecting taxes. In essence, these government entities can compel the employee by law to disclose the terms of the severance agreement and are not themselves bound by the agreement. For example, in response to an application for unemployment benefits with the EDD, the EDD can require the employee to disclose what other sources of income have been received, if severance payments were made, and the amount of those payments.
What happens if the employee breaches confidentiality?
Severance agreements usually specify what occurs if the employer or employee violates or “breaches” the terms of the settlement agreement, including its confidentiality clause. These penalties can range from a penalty of multiple thousands of dollars called “liquidated damages” or also forfeiture of part or all of the severance payment itself.
Many severance agreements also include an attorney’s fees provision called a “fee hook”. This means that if a severance agreement is breached and court action is required to enforce the agreement that prevailing party gets their attorney’s fees paid back. This can be extremely significant because attorney’s fees could easily match or exceed the amount of the severance payment itself. These fees would be in addition to whatever penalties or damages are recovered as a result of a breach.
For these reasons, employees should take confidentiality very seriously and thoroughly understand the terms of the severance agreement before signing it.
Have you been terminated and been handed a severance agreement? Contact the Law Office of Brian Mathias today for an affordable consultation.