A severance agreement is a contract between an employer and an employee detailing the compensation package an employee would get in exchange for the termination of the latter's employment. This document outlines the rights and responsibilities of both the employee and the employer if an employee loses their job due to layoffs or other circumstances.
It summarizes the benefits the employee could receive and explains what steps they must follow to be eligible for those benefits.
Please note, severance agreements and this area of the law is widely based on jurisdiction, specific company policies, and case specific circumstances. It is recommended to consult a local employment lawyer if you have any further questions.
You don't have to draw up a severance agreement every time someone leaves your business. For example, when you fire someone for severe misconduct, giving them a severance agreement may be seen as inappropriate and awarding bad behavior. If you have a clear justification for letting someone go and they do not pose a risk to the company, a severance agreement may not be appropriate. However, severance agreements are more popular when the employee in question has access to sensitive company information or is terminated due to circumstances beyond their control.
Common situations for offering severance pay include:
Many severance agreements start by listing the reason the employee is being fired or asked to resign. The severance agreement explains that both the employer and the employee want to reach a satisfying agreement to officially settle their differences and part ways professionally.
The agreement should explain when the employee was hired, the date of termination, and information on how long the employee has to accept or reject the severance agreement.
Severance pay is usually the most significant employee benefit of accepting a severance agreement. This can be a percentage of the employee's salary for a certain amount of time made in regular payments or a large lump sum.
Compensation for unused vacation benefits and paid time off can also be part of a severance package. Companies may allow the employee to take their paid vacation and sick days before leaving or pay out the amount they would have earned from taking those benefits while they were still eligible.
Agreeing to continue health coverage is another key benefit and can help provide stability for employees while they look for a new employer to sponsor their medical benefits. According to the Consolidated Omnibus Budget Reconciliation Act (COBRA), employees are legally entitled to continue receiving medical benefits for up to a year and a half after their termination, but the length may vary depending on qualifying events.
If your company gives stock options as a benefit, changing the vesting schedule so that the employee can cash out could be a valuable severance benefit.
Businesses provide outplacement assistance and career coaching to help employees find a new job after they are laid off or let go for another reason. This benefit gives employees reassurance that they will have some career stability and shows that you care about their wellness outside of their role at your company.
After explaining what the employee will receive in exchange for signing the severance agreement, the document explains the stipulations for getting those benefits. This usually starts with a general liability waiver, where the employee agrees not to make or pursue any legal claims against the company.
If the employee has company property in their possession, the severance agreement can go over how and when they are expected to return it. This helps ensure a peaceful transition and ties up the loose ends of terminating an employee.
Just as a non-disparagement clause keeps the employee from defaming your company, a reference check clause can prevent the company from giving a negative reference to future employers. Some employers agree to give a positive reference as part of the agreement, and may even provide the employee with a reference letter for them to approve.
Any severance agreement for employees over the age of 40 must refer to the Age Discrimination in Employment Act to inform the employee of their legal rights.
Part of the severance agreement is an explanation of what the employee is allowed to disclose to others after signing. Some companies make the agreement itself confidential, meaning that the employee cannot tell anyone the terms of the severance agreement they signed. It can also include other company information such as customer data and internal processes.
Employers include a non-compete clause to ensure the employee will not enter into competition with their company using company resources. Non-compete clauses can have an expiration date and apply to a certain geographical area.
A non-disparagement clause explains that the employee cannot spread negative information about the company for a certain period of time.
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