Severance agreements and severance packages in Norway

Dalan law firm regularly assist in cases involving severance agreements for our international clients, both employers and employees. We have therefore written an article on the most common topics that arise for employers and employees in connection with severance agreements i Norway.

 The article is intended to provide an introduction and thus also a better basis for decision-making for the parties when severance agreements are a relevant topic. However, the article does not replace legal advice – A lawyer should therefore be contacted if you want help in your case.

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What is a severance agreement?

A severance agreement is a voluntary agreement between employer and employee on termination of employment on the terms as laid out in the agreement.

The severance agreement is characterised by the employer providing the employee with compensation for accepting a voluntary termination of employment. Compensation is given in the form of severance pay, wages without work duties and/or damages for non-economic loss.

Severance agreements are very convenient and are used in many different situations. It specifies a smooth and flexible way of terminating the employment relationship and can therefore often be a practical solution to a dispute or deadlock. Most employment law disputes end with an agreement, so that relatively speaking, only a few disputes entails lawsuits, and only a few of these again end in a ruling by the court.

Is the severance agreement legally binding?

Severance agreements are legally binding. This entails that the parties demand fulfilment of the agreement and furthermore that breach of contract triggers legal remedies. Both employer and employee can claim compensation for the financial loss caused by the breach of contract. In the event of a material breach, the final agreement may also be terminated with the effect that the parties’ obligations and rights under the contract cease with immediate effect. However, a severance agreement cannot be terminated with the effect that the employment relationship is restored. In this context, termination has an impact on future rights and obligations, though does not have so-called retroactive effect.

In certain special situations, employees may withdraw their own acceptance of a severance agreement pursuant to the so-called rules «re integra». The prerequisite is, inter alia, that the employee quickly declares himself unbound and that there are other special circumstances that make a revocation reasonable. Moreover, severance agreements may conceivably be entered into in such a way that they are in reality to be regarded as termination or dismissal. This phenomenon is referred to as reclassification. The consequence is that the employer may be liable for damages and that the employee may claim judgment of invalidity and to re-enter the position.

Can an employee claim a severance agreement?

Neither the employer nor the employee can demand that a severance agreement is entered and agreed upon. A severance agreement is a voluntary agreement that requires the consent from both parties. That is also the case in redundancy processes.

However, it may be that the parties have sufficient means of exerting pressure on the other party to make it worthwhile for the other party to accept an offer of a severance agreement with the terms and conditions set out in the agreement. A negotiating climate for negotiating a severance agreement may thus arise as a result of one party having and exercising legitimate pressure.

Employees may be able to exert pressure where the employer has committed clear and irreversible errors, such as unfair dismissal. It may also be that the employer wishes to terminate the employment relationship, but sees that there is no legal basis for doing this without an agreement with the employee. In these situations, the employee’s bargaining power and means of pressure will force a willingness from the employer to accept a severance agreement on the economic terms as set out in the severance agreement.

The employer’s negotiation position will on the other hand, be good if there are legal grounds for dismissal with notice or summary dismissal. In these situations, the employer has alternative courses of action to a severance agreement, and thus do not necessarily have to accept severance agreements that deviate from what follows from the Working Environment Act. According to Norwegian employment law the employee is for one thing obliged to work and receive salary in the notice period.

The assessment of the employee’s and employer’s possibilities in forcing a severance agreement on terms favourably for them will therefore also depend on an assessment of the party’s legal position. This means that legal assistance should be obtained in order to assess the specific legal room for manoeuvre and to assess the instruments that may be relevant for resolving the case. These assessments require specialized expertise.

What determines the size of the final agreement?

The amount of compensation in the final agreement depends on the negotiating position in the case as described above.

Compensation may furthermore wary between salary for the notice period without obligation to work to 1 – 2 years of compensation pay. Often a severance package is not offered.

In addition, the financial framework for the final agreement may also be based on the following circumstances:

1. Has the employer committed irreversible errors, for example in the form of an unfair dismissal?
2. Are there grounds for dismissal with notice or summary dismissal?
3. How stressful will legal process be for employer and employee?
4. What opportunities does the employee have for new work?
5. What is the position and role of an employee in the enterprise?
6. How long has my employment lasted?
7. What is the personal chemistry like between those involved?
8. What is the practice is there in the business and the industry for severance packages? And on what terms?

The economic terms of the severance agreement also depend on the rights and obligations that otherwise follow from the severance agreement. For example, it is natural for employees to be compensated separately for submitting to a non-compete clause or customer clause.

It may also be important whether severance pay is paid regardless of whether the employee finds new work or whether it is curtailed or lapsed in connection with new work, so-called wage guarantee.

If the severance pay is paid regardless of the new employment relationship, the employee has an upside if he or she finds new employment before the compensation period expires. This means that the employee has an upside that compensates for any downside that occurs if the employee does not find new work by the end of the agreed compensation period.

It is then natural that the compensation length is shorter when the employee has an upside than where the employee has no upside, as is often the case with wage guarantees.

What does the severance agreement usually contain?

 The content of the severance agreement depends on the specific case. As a rule, the agreement will contain provisions on the following:

1. Termination and resignation dates
2. Work duties / exemption from work
3. Salary and working conditions until termination, including any bonus, overtime, pension benefits,
4. Severance pay,
5. Any coverage of legal expenses
6. Holiday period, refund of advance deductions and holiday pay
7. Return of assets and reimbursement of expenses
8. Testimonial and reference
9. Confidentiality
10. Possible non-compete clause, customer clause or non-poaching clauses
11. Full and final settlement clauses, including waiver of the right to file a lawsuit and preferential right to new employment.

 When do I hire lawyer in cases involving severance negotiations?

 Generally speaking, you should consider engaging a lawyer when a severance agreement or termination/dismissal is a topical issue. When these issues are relevant topics, the parties should simultaneously clarify their legal position and thereby also their bargaining position in the negotiations that may come.

For the employer, this will mean that legal assistance is often obtained when the employer wishes to terminate employment, i.e. that dismissals with notice or summary dismissals are considered. In such cases, alternative courses of action, including the legal durability of termination of employment should be considered, so that the appropriateness of offering severance agreements is assessed in connection therewith. This usually means before the so-called consolidation discussion that must be held before dismissal. In cases of redundancy, severance agreements and the basis for calculating extraordinary remuneration is often a topic of discussion with worker representatives. In cases of so-called mass redundancy, the employer is obliged to hold such discussions.

For the employee, a lawyer will often be procured in connection with a summon to consolidation discussion meeting or after the employee has received a dismissal.

If a lawyer is engaged before a discussion meeting, the work will normally consist of evaluation the legal ground of any possible dismissal and in ensuring that the employee positions himself or herself as best as possible for what may come.

It may also be that a lawyer is procured without the case necessary being a formal dismissal case. This may, for example, be the case were there is a an untenable working relationship or if the employee’s position or working conditions are changed in such a substantial manner that it is in fact a termination of employment in combination with an offer of employment on new terms.

If a lawyer is hired after termination is given, the work consists of reviewing the legal durability of the dismissal and, if necessary, attempting to negotiate a solution if the employee so wishes. It is then natural to demand a so-called negotiation meeting. The employee is entitled to such a meeting if requested within 14 days of receipt of termination.

Legal process and severance agreements

Even if the case is not resolved and lawsuits are filed, disputes between the parties are often resolved. As a rule, cases are resolved in judicial mediation, which is a voluntary mediation scheme under the auspices of the court that has the case under consideration.

Employment law disputes are regularly resolved amicably in one way or another, so that only a few end up in court with full court proceedings. If the case ends with this, it is important that the legal validity of the termination is properly assessed.