STRAIGHT TALK:
EMPLOYMENT CONTRACTS AND SEVERANCE PLANNING
© 2003 By Douglas E. LoMonte
This article is specifically directed to private employers doing business in Connecticut and their employees who are not subject to a collective bargaining agreement.
"At-Will" Employment. Connecticut law does not require employers and employees to enter into formal written employment contracts. Most employees who do not have written employment contracts are classified under Connecticut law as "at will" employees, meaning that the employment relationship has no fixed duration and either the employer or the employee may terminate the employment relationship at any time.
Exceptions. If you are an employee without a written contract, you should not, however, simply assume that your employer may terminate you for any reason. That’s because there are significant exceptions to the doctrine of "employment at will". Some of those exceptions are statutory, meaning that Congress or the State Legislature passed a law. Other exceptions are the result of judicial action, meaning that there is a court case on the subject.
Both employers and employees should consider the following questions. Is the individual a "whistle blower"? Is the individual being terminated because he or she is a member of a protected class (e. g., age, race or gender)? Does the Company’s employee handbook have provisions that are inconsistent with "employment at will"? Have any of the executives made any oral promises to the individual? If the answer to any of the above questions is "Yes", then the law may restrict the grounds on which the individual may be discharged.
Benefits of Written Contracts. Many employers find it convenient to maintain "at will" employment relationships with their employees. Nevertheless, many of those same employers find it desirable to enter into formal written employment contracts. Is that a contradiction? No. In those cases, the contracts typically make specific reference to the "at will" nature of the relationship and go on to provide important covenants restricting the employee’s activities upon termination. Among those covenants are non-solicitation (i.e., thou shalt not take any colleagues or subordinates with you when you leave), non-competition (i. e., thou shalt not go to work for a client/customer) and non-disclosure (i. e., thou shalt not reveal the company’s secrets). I’ve found that those covenants are particularly important for key executives, particularly in consulting service and technology driven companies.
Another important benefit of written employment contracts is that they serve to eliminate potential misunderstandings regarding incentive compensation. Ask yourself these questions. Does your company have a bonus arrangement? Is that arrangement based the company’s performance or profitability? Looking at the situation objectively, is there more than one way that the company’s performance or profitability may be measured or interpreted?
Timing. Of course, most lawyers advise their business clients that the best time to establish a written employment contract is at the very beginning of the employment relationship. Undoubtedly, that’s true. So, what to do about existing employees without written contracts? Many employers find it convenient to condition a promotion or raise on the execution of a written contract.
If you’re an employer, I’ll be happy to discuss the preparation of an employment contract for your employees. If you’re an employee with concerns about your written contract, I’ll be happy to review the document with you.
Severance Planning. Connecticut law does not impose an obligation on employers to offer severance payments (e. g., two weeks’ salary) to employees. Some employees may be entitled to severance payments, but if they are, it’s generally pursuant to some binding contractual arrangement. As an employer, there are a number of steps that you are legally required to take when you discharge an employee (e. g. final wage payment, notice of continuation of health care insurance coverage, qualified retirement plan distribution notices, etc.). A formal written severance agreement is not one of those steps.
Waiver and Release. On the other hand, you may wish to consider asking your departing employees to sign a severance agreement containing a waiver and release of claims. Employees may be incentivized to sign such a release by an offer of a cash severance payment. A word to the wise, however: there are laws that restrict the content and use of waivers and releases in the context of an employment termination. For example, the language in the document must be reasonably clear and the employee must have a specific period of time within which to consider/reconsider his or her signature. Accordingly, I strongly advise both employers and employees to have their severance documents reviewed by qualified legal counsel.
If you have any questions or comments about this article, please share them with me. You may reach me at dlomonte@wsdb.com .
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