One of the key reasons employers sign severance agreements is to ensure a smooth departure for both the employee and the employer. Severance agreements can also help ensure that the morale of other employees does not suddenly deteriorate. But is your severance agreement sound? The professional employment law attorneys at Garcia & Gurney, A Law Corporation have extensive experience helping clients in Pleasanton and throughout the Bay Area create severance agreements. When you seek our assistance, you gain the support of a legal team focused on protecting your best interests and helping you maintain compliance with IRS regulations.
A severance agreement is a contract between an employer and an employee that specifies the terms of the employee’s termination. Severance agreements usually waive the employee’s right to file a lawsuit. This agreement (whereby the employee gives up the right to sue) is typically referred to as a release. However, in exchange for signing a release, the employee must receive something of value. Additionally, a severance agreement may prohibit an employee from using propriety information in any future employment.
Section 409a of the Internal Revenue Code sets forth strict rules regarding the payment of deferred compensation to employees. Anytime an employee is vested with a right during one year to receive compensation in another year, deferred compensation is being awarded to the employee. If the deferred compensation is not exempt from section 409a, or in strict compliance with 409a, the employee will face substantial tax penalties on the compensation — and the employer will potentially be subject to withholding penalties.
Severance compensation that is payable under a severance agreement is almost always deemed compensation. It is therefore important for employers and employees to ensure that the severance agreement complies with Section 409a. Such compliance requires that the severance agreement meet a six-month delay for key employees (if applicable), set a severance payment date and satisfy the timing requirements of 409a.
Structuring 409a-compliant severance agreements can be especially tricky when the employee is required to execute a release before receiving payment. These arrangements, if not carefully managed, can result in an employee exercising excessive control over the timing of payments by deliberately withholding the release. Given complications of this nature, it is best to speak with a competent employment attorney before entering into severance agreements.
Garcia & Gurney, A Law Corporation serves businesses from the Tri-Valley to Silicon Valley, including Pleasanton. For help with a labor and employment issue or other business law matter in and around Alameda and Contra Costa Counties, contact us today by phone at 925-468-0400 or online.