What is a severance agreement?

A severance agreement is a legal document that outlines the rights and obligations of an employee and the employer in the event of the employee leaving the company (either voluntarily or involuntarily). It includes information on severance pay, the benefits they may receive, and any confidentiality or non-compete clauses to which both parties must adhere. The agreement is typically used when an employment relationship ends, but it also may apply to contractors or consultants affected by a company sale or merger.

What is the need for a severance agreement?

 

Protection of both parties' interests

By setting clear expectations and obligations, severance agreements safeguard the employer's intellectual property and trade secrets while providing compensation and benefits to the employee.

 

Limitation of liability

A severance agreement can limit an employer's liability by ensuring that a departing employee cannot file a wrongful termination lawsuit or compete with the company.

 

Compliance

A severance agreement helps employers adhere to legal requirements, including anti-discrimination laws, wage regulations, and hourly labor laws. With the terms of separation clearly defined and legally compliant, employers can mitigate the risk of legal issues.

 

Foster positive relationships

A severance agreement can minimize potential tensions and foster positive relationships by providing a clear and transparent process for the termination of employment.

What are the elements of a severance agreement?

A severance agreement is a legal document explaining what an employee receives upon agreeing to their employer's terms of separation. Although every severance agreement varies in nature and scope, they share some common elements, such as:

Timeline

The timeline section in a severance agreement outlines all key dates, such as the employee's hiring, termination, and the deadline for accepting or rejecting the agreement.

Return of company property

This section outlines details on any company-owned property that the employee must return along with a deadline.

Severance pay

This section of the contract specifies the amount of severance pay provided to the employee. This varies based on the employment duration, and can be a percentage of the employee's salary for a certain amount of time made in regular payments or one large lump sum. This section may also have details on the compensation for unused paid leaves or vacation benefits.

Health insurance

Maintaining health coverage is a valuable benefit for employees during a transitional period. The Consolidated Omnibus Budget Reconciliation Act (COBRA), passed by the U.S. Congress, mandates that terminated employees can continue receiving medical benefits for up to 18 months after termination. This section describes this entitlement, including the end date of coverage.

Non-disparagement clause

Including this clause in the agreement restricts the terminated employee from making negative remarks or sharing false information about the company and its stakeholders.

Confidentiality clause

This part of a severance agreement specifies what information an employee can and cannot share with others. This includes keeping the agreement confidential and not disclosing sensitive company information such as customer data and internal processes—an essential part of the agreement that safeguards the company's interests.

Frequently asked questions

  • Under what circumstances can a severance agreement be offered?

    Common situations for offering severance agreements include:

    • Layoffs due to downsizing or restructuring
    • Job or position elimination
    • A mutual understanding to part ways
    • The employee retires or resigns
    • Termination due to company policy violations or poor performance
    • Complying with legal obligations or industry standards

  • How is severance pay calculated?

    A severance package is a set of benefits for employees who leave a company under specific circumstances. Severance pay is calculated based on the employee's salary and the length of their employment. The standard severance pay is usually between six and twelve months of the employee's current salary.

  • Can employees negotiate their severance package?

    Yes, employees can negotiate the terms of their severance package. Common negotiable terms include paid time off, liability waivers, continued benefits, non-compete agreements, and references.

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