Can a Severance Agreement Eliminate the Right to Claim Disability Insurance Benefits?

When an employee leaves their job, either voluntarily or involuntarily, their employer may offer what is known as a severance package. These deals are often attractive, offering pay and/or benefits for a period of time after an employee leaves the company. Unfortunately, the agreements that underlie these packages are typically very unfavorable to employees.

A severance agreement may limit your rights in several important ways. This may include preventing you from filing a claim for disability insurance benefits if you are unable to work due to a disability. An experienced New Jersey disability benefits attorney can review the contract and your disability insurance policy to help you negotiate a better agreement or otherwise preserve your rights.

What Is a Severance Agreement?

A severance agreement is a type of contract between an employer and an employee that outlines the financial terms on which an employee will leave the company.  These agreements typically cover the pay and benefits that an employee may be entitled to or otherwise receive.

Federal law, such as the Fair Labor Standards Act, does not require severance pay. Similarly, neither New Jersey nor Pennsylvania law requires an employer to provide severance pay to a terminated employee.

Instead, severance is a contractual matter between an employee and an employer. In some organizations, severance packages are covered in the employee handbook. Most often, severance packages are offered to employees who are laid off or who retire, although individuals who resign or who are fired may also negotiate a severance agreement.

A severance agreement may cover terms such as:

• Additional payment based on months of service
• Retirement accounts
• Stock options
• Payment for unused accrued paid time off and/or holiday pay
• Insurance benefits
• Non-insurance benefits and perks
• Employment services
• Non-compete agreements
• Non-disparagement 
• Release of current and future claims

If you sign a severance agreement, you may be giving up a number of important rights. For example, if you have a potential sexual harassment claim against your employer, signing this type of contract may waive your right to pursue the claim. 

Generally, severance agreements are enforceable, as long as the employee signed the contract knowingly and voluntarily. Under New Jersey law, a release of employee rights is determined by considering a number of factors, including:

1. The employee’s education and business experience;
2. The amount of the time the employee had possession of or access to the agreement before signing it;
3. The role of the employee in deciding the terms of the agreement;
4. The clarity of the agreement;
5. Whether the employee was represented by or consulted with an attorney; and
6. Whether the consideration given in exchange for the waiver exceeds employee benefits to which the employee was already entitled by contract or law.

If your employer has presented you with a severance agreement, you should consult with a lawyer before signing it.

How Signing a Severance Agreement Can Impact Your Right to Benefits

Companies may offer an employee a severance agreement when they are unable to work due to a disability. These offers may be particularly attractive to a person who is struggling with a physical or mental health condition. A severance package may allow you to focus on your health for a period of time, rather than attempting to work and take care of your medical condition.

Yet many severance agreements contain specific provisions that — if signed — waive an employee’s right to pursue any and all claims against an employer. This includes the right to pursue short or long-term disability benefits. While a severance package may seem like a good idea for the immediate future, over time, it may cost you a significant amount of money if you waive your right to file a disability insurance benefits claim.

Both short and long-term disability benefits can be particularly valuable to employees. Short-term disability benefits provide compensation for individuals who are unable to work due to a disability. These benefits are available for a limited period of time (anywhere from 9 to 52 weeks) and offer payments of between 40 and 60% of your salary.

In contrast, long-term disability (LTD) benefits offer payments for an extended period of time, which may be from 24 months until retirement age. Depending on your policy, LTD insurance benefits will provide payments of between 50 and 60% of your salary. You can apply for LTD benefits after an elimination period, which is usually 6 months after the start of your disability.

A severance agreement may specifically limit your ability to claim disability benefits in a number of ways. First, the agreement may specify that you receive payment and benefits until a certain date. In this situation, your coverage for disability claims may end as soon as your benefits do.

Second, the insurance policy itself may include provisions that state that employees who no longer work at the company as a result of a severance agreement are not eligible for coverage. If your employer’s disability insurance policy contains this type of provision, then you will be unable to file for benefits once you sign a severance agreement.

Third, most — if not all — severance agreements require the employee to release all claims against the employer. The language of these release provisions is usually broad, addressing claims that arose prior to signing the agreement, regardless of whether you know about the claims when you signed it. If you sign a contract that contains this language, then you are likely waiving your right to apply for disability insurance benefits.

It can be difficult to understand exactly what you are agreeing to or giving up when you sign a severance agreement. This is particularly true because an insurance policy may contain provisions that relate to a severance agreement, both by offsetting any money you may receive by the amount of your severance and by potentially eliminating your eligibility altogether. For this reason, it is vital to talk to a skilled disability attorney before you sign a severance agreement; they can review both the contract and the relevant insurance policies to help you make the best decision.

Consult with a New Jersey Disability Benefits Attorney Before Signing Anything

It may be tempting to sign a severance agreement without examining it closely or talking to a lawyer — particularly when you are already dealing with health issues. The potential for a payout and/or continuation of benefits is often attractive, especially when you do not feel able to work. Yet doing so can lead to a waiver of important rights, like the ability to claim disability insurance benefits. 

Bross & Frankel represents individuals in both New Jersey and Pennsylvania who are unable to work due to a disability. We aggressively advocate for our clients, which often includes helping them negotiate the terms of a severance agreement so that they are still able to file a disability claim. Contact us today at 856-795-8880 or online to learn more or to schedule a free initial consultation.