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What Is a Severance Agreement?
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 in the event that an employee loses their job due to layoffs or other circumstances. It summarizes the benefits the employee could receive and explains what steps they have to follow to be eligible for those benefits.
Why Should I Have a Severance Agreement in Place?
The main purpose of a severance agreement is to prevent your employees from filing for a wrongful termination lawsuit against your company, but there are several reasons a company could opt to provide a severance package. Some businesses give severance packages as part of standard company procedure and describe their severance policy in the employee handbook well in advance of actually letting an employee go. Others draft severance packages to cut a deal with a specific high-level employee. Severance agreement terms are highly customizable to bring different benefits to your business.
Some of the positive results of providing a severance agreement to your employees are:
- Fostering goodwill with terminated employees
- Protecting private company details, processes and data
- Showing respect to remaining employees
Circumstances for Offering Severance
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:
- Company restructuring
- Eliminating a position or department
- Bad fit for a role or company culture
One example of an appropriate situation for severance pay is the termination of a top company manager. Their employer might provide a severance agreement with the condition that the manager could not work for a direct competitor for the next six months. In this case, the severance agreement helps protect company operations during a transition period. Severance agreements are also common when the employer is concerned about a discrimination or harassment lawsuit and is willing to pay benefits in exchange for an agreement not to sue.
Can Employees Reject a Severance Agreement?
Just as your company is not legally obligated to offer a severance package to employees, the employees are not required to accept a severance package from your company. If the severance package does not benefit the employee and only helps your company, they may reject it and feel insulted by being offered a low-value deal.
Components of a Severance Agreement
A severance agreement is a complex legal document that has many standard parts explaining what the employee will receive in exchange for agreeing to their employer's terms of separation. Because the severance agreement finalizes an employee's termination and can influence employee behavior after they leave, the consequences of each clause need to be carefully considered. Talk with a contract lawyer for help deciding what elements you should include in a separation agreement document for your business.
Reason for Separation
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.
Image via Unsplash by Scott Graham
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.
Paid Time Off
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.
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. The liability release is designed to protect:
- Other employees
- Company directors
- Affiliated companies
The general liability release usually specifies a few key instances to protect the company from litigation from:
- Wrongful termination
- Civil rights violations
- FMLA violations
Once the employee agrees to this section, they waive their former right to take legal action against the company.
Return of Company Equipment
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.
Reference Check Procedure
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.
Having a strong severance agreement can protect both you and your employees during a staff transition. Negotiating each clause with employees to come to a mutually beneficial agreement helps ease the tensions associated with terminating an employee and sets both parties up for future success.
Meet some of our Severance Agreement Lawyers
Jennifer is an experienced business law attorney who has worked with many startups as well as established corporations. With a strong background in contract creation and review, she will be able to ensure you and your business interests are always protected.
I am a corporate lawyer with expertise working with small businesses, venture capital and healthcare. Previously, I worked at large law firms, as well as head attorney for companies. I graduated from Harvard College and University of Pennsylvania Law School. I speak 5 languages (Spanish, French, Italian and Russian, plus English), visited over 60 countries, and used to compete in salsa dancing!
I am a licensed attorney and a member of the California Bar. I graduated from the University of Dayton School of Law's Program in Law and Technology. I love IP, tech transfers, licensing, and how the internet and developing technology is changing the legal landscape. I've interned at both corporations and boutique firms, and I've taken extensive specialized classes in intellectual property and technology law.
Jo Ann J.
Jo Ann has been practicing for over 20 years, working primarily with high growth companies from inception through exit and all points in between. She is skilled in Mergers & Acquisitions, Contractual Agreements (including founders agreements, voting agreements, licensing agreements, terms of service, privacy policies, stockholder agreements, operating agreements, equity incentive plans, employment agreements, vendor agreements and other commercial agreements), Corporate Governance and Due Diligence.
I am an unabashed contract law geek with a passion for delivering contracts that protect your business within your risk tolerance. Contracts should be clear, concise, and able to be understood by the end user. I promote Plain English contract drafting. I also pay close attention to the boilerplate traps that trip up many agreements. Some of my most frequent drafting projects are entity operating and shareholder agreements, bylaws, asset purchase agreements, commercial leases, EULA, Terms of Service, Privacy Policies, Confidentiality agreements, employment agreements, and more.
I hold a B.S. in Accounting and a B.A. in Philosophy from Virginia Tech (2009). I received my J.D. from the University of Virginia School of Law in 2012. I am an associate member of the Virginia Bar and an active member of the DC bar. Currently, I am working as a self-employed legal consultant and attorney. Primarily my clients are start-up companies for which I perform various types of legal work, including negotiating and drafting settlement, preparing operating agreements and partnership agreements, assisting in moving companies to incorporate in new states and setting up companies to become registered in a state, assisting with employment matters, drafting non-disclosure agreements, assisting with private placement offerings, and researching issues on intellectual property, local regulations, privacy laws, corporate governance, and many other facets of the law, as the need arises. I have previously practiced as an attorney at a small DC securities law firm and worked at Deloitte Financial Advisory Services LLC. My work experience is dynamic and includes many short-term and long term experience that span across areas such as maintaining my own blog, freelance writing, and dog walking. My diverse background has provided me with a stong skill set that can be easily adapted for new areas of work and indicates my ability to quickly learn for a wide array of clients.
Texas licensed attorney specializing for 20 years in Business Law, Contract Drafting, and Risk Analysis. My services include: Corporate Risk Consulting; Contract Review and Drafting; Legal Research and Writing; Business Formation; Article or Instructive Writing; and more. For more insight into my skills and experience, please feel free to visit my LinkedIn profile or contact me with any questions.