Though not obligated to by law, employers typically offer severance packages as a gesture of goodwill and recognition of an employee’s service. It is also not uncommon for disabled employees to be offered a severance package when they can no longer work due to a disabling medical condition. However, an employee should be careful when signing a severance agreement because it may eliminate all future rights to any disability benefits. This is because employers also provide severance packages to prevent lawsuits, as employees often sign a release agreeing not to seek further compensation or pursue legal action as part of the separation agreement.

Severance Agreements and the Danger of General Releases

Most severance agreements drafted by employers include broad-reaching language that requires you to agree to release your employer from any and all claims that you may have against your employer in exchange for the amount of money to be paid to you under the severance agreement. The language of severance agreements varies greatly, but no matter how broad or specific the wording is, the danger exists that you are waiving all future rights to any disability benefits in signing the severance agreement. This is because most general releases include the Employee Income Security Act (“ERISA“) among the many laws under which claims are released.

ERISA governs benefit claims and the right to file lawsuits to enforce such claims.  Accordingly, ERISA also governs most short- and long-term disability benefits.  Therefore, any release that broadly waives all claims under ERISA could potentially be invoked by the employer or insurance carrier as a basis for denying a short-term disability or long-term disability benefit claims. Most employers have no intention of precluding such claims. Therefore, if the general release contains language waiving ERISA claims, you must negotiate language to exclude such claims (and the right to commence legal action to enforce those claims) from the waiver.

General releases are often discovered by insurance carriers and enforced at the litigation stage.  These releases typically include broad language that covers not just the employer but its agents, claim and plan administrators, benefit plans, and insurance carriers.  However, because the release is exchanged between employer and employee, an insurance carrier may be unaware that a general release exists and may process a life or disability claim in the typical fashion.  If the claim is denied, the employee’s appeal is also denied. The employee may try to file a lawsuit to seek enforcement of their entitlement to benefits. However, the insurer may contact the employer to obtain relevant information and discover the existence of the release.  If so, the release may be invoked to bar the lawsuit — regardless of the claim’s merits or the insurance carrier’s prior administrative handling of the claim. 

Severance Pay Can Reduce Disability Benefits

Most short-term and long-term disability plans contain a list of income/benefits that will reduce the disability benefit payment amount.  Generally included in this list are Social Security disability benefits, worker’s compensation benefits, and employer-funded early retirement benefits.  Severance pay may be explicitly listed as an offset or as an exception to the list of offsets.  In such a case, it will be clear whether and to what degree the severance pay will result in additional overall benefits. If the disability plan treats severance pay as an offset, it may be possible to negotiate with the employer to designate a payment associated with the termination of employment as a “payment for the release of claims” rather than a severance payment. Disability insurance plans rarely list release payments as a deductible source of income. So, designating the payment as such may dissuade the insurance carrier from seeking an offset concerning such a payment.

Before You Sign a Severance Agreement, Consult an Attorney

Once you sign a severance agreement, it is challenging, if not impossible, to go back and ask for it to be changed. The language may not make it clear whether you are explicitly waiving your rights to any disability claim under an employee benefit plan, or it may make it very clear that you are waiving your rights. For that reason, you should be sure to consult with a skilled disability insurance attorney before signing a severance agreement. An experienced attorney can review your severance agreement and help you understand your rights.  The attorney can also negotiate the inclusion of ERISA carve out language and ensure that severance is not considered an offset under the disability policy.

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