Severance Agreements By Employers

What Is a Severance Agreement?

A severance agreement – also known as a separation agreement – serves as a contract between an employer and an employee documenting the rights and responsibilities of both parties upon and after the termination of the employment relationship. A severance agreement is normally presented to an employee when terminating an employment relationship.

The contract typically contains any severance benefits the employee will be entitled to, such as severance pay or other benefits the employee will receive. By outlining these benefits, this agreement helps end an employment relationship in a mutually beneficial manner.

However, the purpose of the severance agreement is also to ensure that the employee agrees with the terms of their termination. If an employee signs a properly worded severance agreement, they can’t file a wrongful termination, discrimination, or other lawsuit.

Just as the company is not obligated to offer severance packages, terminated employees are not required to accept them.

Why Should You Have an Employee Sign a Severance Agreement?

You want an employee who is leaving (either resigning or being fired) to sign a severance agreement to avoid problems in the future. There is no law that requires an employer to pay an employee beyond the wages, commissions, or non-discretionary bonuses earned. Because a typical severance agreement involves the payment of extra money to an employee, you will want to get certain things in return for your company.

Sometimes, the most important reason to get a severance agreement is to eliminate the possibility of future claims against you, your company, or those affiliated with your company for any employment-related issues by the terminated employee. You are paying for future peace of mind.

In other situations, the most important term to your company could be to have the employee agree to not compete or take your employees for a certain period of time. I also have seen situations in which a company is not concerned with what a disgruntled employee would do, but what they would say. In these cases, the importance of the separation agreement is to require that the former employee keep certain information confidential and not talk badly about the company.

What Does a Severance Package Include?

A severance agreement is a complicated legal document that can explain what the employee will receive if they agree to the terms of separation offered by their former employer.

Although the exact content can vary, some common elements include:

  • Dates of hiring and employee’s termination, as well as any timelines for agreed-upon terms,
  • Severance pay – that can be a lump sum severance payment or made in regular payments,
  • Health insurance coverage – eligible employees are entitled to a continuation of health coverage for up to 18 months through COBRA,
  • Liability release, meaning that the employee waives their right to sue the company or pursue any further claims.

A severance package can also include other requirements, such as that the company property must be returned by the severance date, that the employee cannot compete or work for a competitor for a specific length of time, and that the employee acknowledges they can’t disclose any confidential information they obtained during their employment.

Can You Require a Fired Employee to Sign a Severance Agreement on the Spot?

The answer to this question depends on the age of the employee. Generally speaking, if the employee is younger than 40, yes. But, if the employee is over 40, then the answer is no.

Federal law provides that an employee over 40 cannot be bound by an agreement to give up certain rights without giving them time to consider and then back out of the agreement. This federal law requires employers to give their employees who are older than 40 years old up to 21 days to consider a separation agreement that releases all employment claims and then another 7 days after signing it to consider whether to revoke the agreement.

Can You Re-Use the Severance Agreement for Different Employees?

Of course! That is, unless there is a change in the law. We will work with you to create a severance agreement that you can modify to fit your needs for each situation. You can add or delete language that does not apply, you can change amounts and dates, and you can re-use the severance agreement.

Our goal is to help you create a document that you can re-use. In addition, we want you to feel comfortable knowing that you can reach out to us before a problem arises.

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