When an employment relationship ends, a severance package can provide financial security for the departing employee while protecting the employer from future disputes. In Colorado, structuring severance agreements correctly requires a deep understanding of employment laws and contractual obligations. Employers and employees should know best practices to ensure legal compliance and fairness.
Understanding Severance Packages in Colorado
A severance package typically includes compensation, benefits continuation, and various contractual provisions outlining the employee’s departure terms. Unlike some states, Colorado does not mandate severance pay unless stipulated in an employment contract or collective bargaining agreement. Instead, severance is often used to mitigate risks associated with termination, including wrongful termination claims or potential legal disputes.
Key Elements of a Severance Package
- Severance Pay – This is typically based on the employee’s tenure, salary, and position. Employers may offer a lump sum payment or staggered payments over time.
- Continuation of Benefits—Health insurance, retirement contributions, and stock options may be included in the severance terms.
- Non-Compete and Non-Solicitation Agreements – Many severance packages include restrictive covenants to prevent former employees from working for competitors or soliciting clients.
- Confidentiality and Non-Disparagement Clauses – These provisions help protect a company’s trade secrets and reputation after an employee departs.
- Waiver of Legal Claims – Employers often include a release of liability clause to prevent terminated employees from suing for wrongful termination or discrimination.
- Reference and Reemployment Policies – Some agreements specify what type of reference an employer will provide and whether reemployment with the company is possible.
Legal Considerations for Severance Agreements in Colorado
Colorado employers must comply with state and federal employment laws when drafting severance agreements. The following legal considerations should be addressed:
Compliance with the Colorado Wage Act
Colorado law requires that all final wages, including accrued but unused vacation pay, be paid upon termination (C.R.S. §8-4-109). If severance is tied to a waiver of claims, employees must have ample time to review and negotiate the agreement.
Age Discrimination in Employment Act (ADEA) and Older Workers Benefit Protection Act
(OWBPA)
For employees over 40, severance agreements must comply with the ADEA and OWBPA, which require clear, written terms, a 21-day review period, and a 7-day revocation window.
Non-Compete Restrictions Under Colorado Law
As of 2022, Colorado significantly restricted non-compete agreements under the Colorado Restrictive Employment Agreement Act (C.R.S. §8-2-113). Severance agreements with non-compete clauses must be carefully crafted to avoid unenforceability.
Unemployment Benefits and Severance
Depending on how payments are structured, employees receiving severance may still qualify for unemployment benefits. Lump sum payments may not impact eligibility, while continued salary payments could delay benefits under Colorado unemployment laws.
Best Practices for Employers Structuring Severance Packages
1. Ensure Clear and Concise Language
Avoid overly complex legal jargon. Employees must clearly understand their rights and obligations under the severance agreement.
2. Align Severance Pay with Tenure and Role
A fair severance package typically considers an employee’s service length and company contributions. Standard severance pay is often one to two weeks’ salary per year of service.
3. Offer Time for Review and Legal Counsel
Providing employees with time to review severance agreements and consult legal counsel can prevent later claims of coercion. For employees over 40, this is a legal requirement under the OWBPA.
4. Maintain Compliance with Colorado and Federal Law
Regularly update severance agreements to reflect Colorado employment law changes, such as restrictions on non-compete clauses and mandatory paid leave laws.
5. Avoid Overly Restrictive Clauses
Overly broad non-compete, non-solicitation, or confidentiality clauses can render an agreement unenforceable. Ensure restrictions are narrowly tailored to legitimate business interests.
6. Address Tax Implications
Severance pay is subject to income tax and payroll taxes. Employers should outline these tax obligations clearly within the agreement.
7. Handle Severance Negotiations Professionally
When negotiating severance, take a professional approach to protect the company’s reputation while ensuring the departing employee leaves on good terms.
Contact a Colorado Severance Package Dispute Lawyer
Severance agreements can be complex and, if not properly structured, can lead to legal disputes between employers and employees. Whether you are an employer seeking to draft a legally compliant severance package or an employee facing an unfair severance agreement, Baker Law Group is here to help.
Our team has extensive experience handling employment contract disputes, severance negotiations, and wrongful termination cases in Colorado. Contact us today to discuss your legal options and ensure your severance agreement protects your rights and interests.
Schedule a Consultation with Baker Law Group
If you need assistance with a severance agreement in Colorado, call Baker Law Group or fill out our online contact form to schedule a consultation with an experienced employment attorney.
