Weathering the Recession Without Extra Burden of Litigation

As an employment lawyer, I frequently am asked the question that all business people are asked these days: “How is your business faring in these troubled economic times?” I am personally happy that I can say, “My business is booming.” What I am not happy about is the reason for my current volume of business: more companies are being sued by their former employees, probably because the recession has created more “former employees”.

There are two approaches I recommend to prevent becoming just another company involved in expensive and frustrating employment litigation during this economic downturn:

  1. Don’t cut back on the practices that help prevent employee lawsuits. That means keeping your policies updated, training all of your managers annually on employment law issues like discrimination, continuing to use progressive discipline, and carefully documenting every employee interaction, particularly ultimate employment actions such as hiring, promotions, demotions, reduction in force and terminations. You’ll find lots of postings on this blog giving you more information about how to take these measures if you are a Texas employer.
  2. Prevent lawsuits by using severance agreements when you have to terminate employees. That’s what I want to discuss today.

Texas law is supportive of severance agreements, which are contracts between the exiting employee and the company giving the employee more pay than he is due in exchange for a release of most possible employment law claims. In 2008, 93 percent of U.S. companies who paid any additional severance pay to a departing employee required that employee to sign a release, according to a new study by consulting company Lee Hecht Harrison.

The study found that the traditional idea of severance pay based on tenure (one week for every year worked, for example) is being replaced by packages negotiated by the employees themselves, sometimes before they are even hired. The study found that nationwide, the minimum number of weeks paid in 2008 for all executive employees was 13 and the maximum was 38.

These figures are higher than what I see in the Texas Panhandle. I find that generally my clients are willing to pay 3-6 months of severance to key executives who are departing, while 4-12 weeks of severance compensation is much more commonly paid to lower-level employees when the company doesn’t want to mess with litigation.

Not every departing employee needs to be paid severance compensation, because you do not need a release from every terminated employee. If you have paid attention to the preventative actions described above, have strong written policies, used progressive discipline and documented everything, you may be able to terminate a low-performer without fear of litigation.

However, there are many instances where the firing is not so neat and clean, where the employee is known to be litigious, or where your gut (or your lawyer) just tells you that you need an extra measure of protection when letting a particular employee go. That’s when the severance agreement is helpful.

A severance agreement is a contract which has certain legal requirements to make it enforceable. So kids, don’t try this at home. Call an experienced employment attorney in the state in which the employee is located to help you draft an agreement that will relieve your company of liability and protect the business from the cost and burden of a lawsuit.

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