Question: When crafting a severance agreement, should you follow the guidelines of the state the employee resides/works in or the state where the company is incorporated?
Answer: The answer depends on a number of factors. Often, companies are incorporated in a state in which they have no presence or operations, e.g., Delaware. Although courts will sometimes allow parties to select a law to govern agreements, including severance agreements, the employee may be able to challenge the agreement if it does not comply with the state in which he or she lives or works. In fact, some states, such as California and Colorado, have certain laws that apply to workers within their state, regardless of what the agreement says. If the agreement is drafted to comply with the laws of the state of incorporation, but not the state in which the employee worked, the release might not be effective or enforceable. Indeed, in the event of a dispute, it can be difficult to justify why the law in Delaware, for example, should apply to a worker in Colorado if the company has no operations in Delaware and the employee did not live or work there. Therefore, the best practice is to review the laws of the states in which the employee lives or works, and where the company is headquartered, to ensure the agreement complies with the laws of both states. If the laws conflict, consider drafting the agreement to comply with the more restrictive laws to ensure the agreement will be enforceable.
