10 Important Things to Look For in a Severance Agreement

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When an employee is terminated from a job, their employer has rights and responsibilities to adhere to. Employee rights are outlined in a contract they sign before being hired. In addition, their compensation package can include severance pay or benefits based on termination or layoff.

If you are reviewing a severance agreement as part of your employee benefits package or early termination agreement, here are 10 important things to look for in a severance agreement.

1. Severance Pay

You will first want to identify what type of severance pay you are entitled to after termination or layoff.

Your employment contract should specify whether you are entitled to severance and provide a binding severance agreement between you and your employer.

This pay is a legal and enforceable contract that entitles you to compensation after you are terminated or laid off from your job.

Here is an article to learn more about severance packages and how they are structured.

2. How Severance is Paid (lump sum v. installments)

Severance packages vary by the employer and can also be paid differently depending on the situation.

The two main structures of severance payments are:

  • Lump-Sum Payments: Payments are given to the employee in one, complete payment after they are let go
  • Installments: Payments are made over a period of time. They are monthly for a set duration of time, which essentially gives the employee a stream of steady income while they seek new employment.

In general, severance package negotiation with your employer is allowed within 21 days of receiving it. Take your time deciding what payment method would work best for you.

Here is an article that can teach you more about severance package negotiation.

3. Benefits

Termination can lead to a release of claims to certain benefits in exchange for severance pay. This can include dissolving any benefits you had from the employer. However, there are other benefits you may continue to receive for a period of time following your termination.

Some employers provide continued health and life insurance, job assistance, and other advantages.

You can negotiate your severance agreement benefits as part of your employment contract. But, ultimately, you should feel confident in the exchange.

Here is an article that covers different types of severance package benefits.

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4. Paid Vacation Time

Unclaimed paid vacation time may be claimed through a severance agreement. Many employment lawyers help employees negotiate the greatest pay-out for their time through severance contracts, including unclaimed PTO or unreimbursed expenses.

Suppose you acquired any paid vacation time during your employment. In that case, you have a right to request payment for it in addition to the lump sum severance payout. This amount could be factored into installments as well.

You and your employer should agree on a final total that will reflect your base severance and unpaid benefits during your employment.

Here is an article that can help you learn more about layoff severance.

5. Exact Date of Termination

The effective termination date determines how much pay an employee is entitled to. Therefore, failing to specify the actual termination date can lead to lawsuits.

Employees should have a precise date that designates the end of their employment. However, there may be cases where an employee’s termination date is delayed, even if they are not actively working.

For example, this date may be set to reflect the last day of their final pay period.

Here is an article that details important things to know about termination of employment.

6. Vesting in a Retirement Plan or Stock Options

Vesting gives you, the employee, rights to assets your employer-provided you over a period of time. This includes contributions to a retirement plan or stock investments made on your behalf.

Vesting schedules vary by company; you should know how your employer structures them.

The amount of vested assets you can access depends on the length of your employment, which can influence how much you are entitled to through a severance package.

Here is an article that explains vesting in further detail.

7. Transition Services

Transition services include off-boarding and job assistance that help the employee transition out of their company.

Immediately following termination or layoff, many employees experience significant psychological stress and anxiety.

Termination services provide support and guidance during this challenging period and can improve job outcomes following the employee’s exit.

Here is an article where you can read about the off-boarding process and how it benefits employees.

8. Non-Competition Agreement

A severance agreement may include a non-competition agreement, which prevents the employee from opening a competitive business or working with a specified competitor in a certain geographic radius.

Non-competition agreements are usually signed at the start of employment, not after. Therefore, while reviewing your severance agreement, it is also a good idea to examine your non-competition agreement.

Ensure that your non-compete agreement does not significantly hinder your ability to find employment after leaving your company.

Here is an article where you can learn more about non-competition agreements and their enforceability.

9. Ability to File for Unemployment

If you receive a severance package, you may not legally file for unemployment, depending on your benefits.

If the severance package exceeds the maximum benefit rate, you will not qualify for unemployment assistance through the government.

The severance agreement should specify how much you will be paid and how this payment affects your eligibility for unemployment in your state.

Here is an article that explains how severance pay can affect unemployment benefits.

10. Ability to be Re-Hired

No law prohibits an employer from rehiring a laid-off employee.

However, terminated employees may be listed as eligible or ineligible for rehiring depending on their termination circumstances.

The severance pay should specify under which situations you may not be rehired. These reasons cannot be discriminatory or violate any employee protection laws. For example, employment discrimination against someone’s age, relationship status, race, religion, and similar qualities is not legal.

Here is an article that examines the process of rehiring laid-off employees and the best timeline for doing so.

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