Five Key Things to Look for in an Employee Severance Agreement

Brent R. Borg

Author: Brent R. Borg

POST DATE: 3.1.16
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A severance agreement can be an optimal way to terminate an employment relationship from both the employee and the employer’s perspective.  The benefits of such an agreement include:

  • giving the employee certainty regarding compensation and other benefits the employee can expect to receive upon termination and, if applicable, after termination; and
  • giving the employer certainty that the employee will not bring legal claims that can fester for months and even years after the employment relationship has ended.

These dual certainties give an employee and an employer shared incentives to at least explore the possibility of a severance agreement prior to ending their relationship, as one of the main alternatives to a severance agreement - litigation - is nearly always far less optimal to both parties in terms of time, expense, and stress.

In addition, severance agreements typically are not difficult to negotiate and draft.  Here are five key provisions for employees and employers to keep in mind:

  1. Payout of Earned Compensation. It is common to define when the employee will receive a final payout for all work performed.  Typically this occurs on the employee’s last day worked, or the next pay day following the last day worked.  In addition, the parties may want to specify, if they have not already, whether and how any unused paid leave will be compensated.  Finally, the employer should have the agreement include the employee’s representation that upon receipt of the final payout, the employee will have been paid in full for all work performed during the employment relationship.
  2. Severance (i.e., Post-Employment Compensation). What compensation, if any, will be paid following termination?  If no post-employment compensation will be paid, what other incentives can the parties agree upon?  It is not uncommon, for example, for the employer to agree to not contest unemployment benefits, to provide a neutral reference on the employee’s behalf, or to allow the employee to maintain health insurance for a defined period following termination.
  3. Release Language. This part of the agreement is typically the most important for the employer because it provides a guarantee (with a few limited exceptions) that the employee will not sue the employer for employment discrimination, wage and hour violations, or other common employee legal claims.
  4. Post-Employment Work Restrictions. It is not uncommon for employers to attempt to further bind soon-to-be former employees with restrictions such as agreements not to solicit customers or recruit employees, as well as covenants not to compete.  These post-employment restrictions expire after a specified period of time from the termination date (one or two years is common).  Employees in particular should be mindful of these provisions because they could significantly restrict future work opportunities.  Often the practical effect of negotiating an agreement that includes one or more of these restrictions is to attempt to negotiate for more generous post-employment compensation.
  5. Confidentiality. Confidentiality is often most valuable to the employer because it allows for open negotiation of the agreement at hand without having to worry that the next employee will be privy to that information (and thereby attempt to exploit it). In some cases, confidentiality can be valuable to the employee too, for example if the termination is based on alleged misconduct, and the employee wishes to avoid disclosure of that allegation through a neutral reference.

Termination is one of the most difficult and stressful workplace experiences for both the employee and the employer. Seeing the potential benefits of negotiating an employee severance agreement that focuses on the above five points can significantly mitigate the difficulty and stress of employment termination and, in some cases, actually result in an amicable end to the parties’ relationship. Contact Us to discuss how we can help.

For more information about Brent and his practice, please visit his profile.