Employment Law Note – Can Employers Address Unemployment Benefits in a Separation Agreement?

Businessman Writing A Letter Or SigningWhen our firm is helping employers craft a separation agreement, we occasionally get asked some version of the following question: “What happens if the employee files for unemployment benefits after receiving the separation pay?” This is a good question, and one that raises a number of thorny issues. It is important to understand the relationship between separation payments and future unemployment benefits in Texas. As a starting point, it is important to keep the following ideas in mind.

  1. No waiver of right to file a claim for unemployment benefits
    Section 207.072 of the Texas Labor Code prohibits an employer from requiring or accepting a waiver of rights to unemployment benefits. Specifically, the code states that “An employer may not require or accept a waiver of a right of an individual employed by the employer under this subtitle.” The Texas Workforce Commission is very clear in its online handbook when it states that “Texas law flatly prohibits any agreement not to file an unemployment claim, and any such agreement is void and unenforceable.” Any attempt to have an employee waive the right to unemployment, regardless of whether it was initially suggested by the employer or the employee, could jeopardize the entire separation agreement.
  1. Potential criminal liability
    To reinforce the seriousness of an attempt to waive unemployment rights, the State of Texas has made it a criminal offense to violate Section 207.072. Under Section 207.074 of the Texas Labor Code, an “employer, or officer or agent of an employer, commits an offense if the person violates Section 207.072”, and the penalty can include both a fine and imprisonment for not more than six months. Accordingly, employers and anyone involved in creating or negotiating separation agreements would be well advised to pay attention to any language that looks like a waiver.
  1. Severance pay/wages in lieu of notice
    Certain payments to employees, if properly classified as severance or wages in lieu of notice, will delay payment of unemployment benefits until the payment’s period of coverage has expired. See Sections 207.049(1) and (2) of the Texas Unemployment Compensation Act. This may be important to some employers, as minimizing the unemployment benefits paid to past employees can help avoid chargebacks and payroll tax issues. Now, it is important to remember that these severance or wages in lieu of notice payments do not completely stop unemployment benefits, but they do delay payment for a period of time. The courts have generally defined severance pay to be a payment the employer has obligated itself to make, either verbally or in writing, which is based upon a set formula, such as length of prior service. It is worth noting that “negotiated” severance payments will not affect benefit eligibility. Wages in lieu of notice are additional wages that the employer is not obligated to pay, and that is being paid because the employer has chosen to give the employee no notice of termination.

When it comes to unemployment benefits, the obvious message from the State of Texas is to steer clear of any attempt to waive employee rights. But, even though the employee will always be allowed to apply for unemployment benefits, there are still some innovative solutions that can alleviate the impact of unemployment benefits on the employer. A careful and accurate description of the separation payments being made to an employee is essential. The details of the language used in the separation agreement can become complicated and fact-sensitive, so it’s always best to involve an experienced professional in this process, if possible. A thoughtful approach to separation pay can avoid serious headaches and improve relations with personnel.

George B. Ward and the attorneys at De Leon & Washburn, P.C. are available to assist clients with employment agreements, separation advice, and employment litigation. For more information regarding the firm’s practice areas, please visit the Labor & Employment Law page, and please feel free to contact the attorneys at any time.


© De Leon & Washburn, P.C. This article is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between De Leon & Washburn, P.C. and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. Reproduction in whole or in part is prohibited without the express written consent of De Leon & Washburn, P.C.