- Other employees
- Shareholders
- Company directors
- Subsidiaries
- 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
- Discrimination
Once the employee agrees to this section, they waive their former right to take legal action against the company. It is worth noting that this would include nearly all claims, and not just the ones listed above.
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.
See Severance Agreement Pricing by State
What's Included in a Typical Severance Package?
Even without a legal necessity, many employers offer severance to reduce the chance of facing wrongful termination lawsuits. This strategy can work for a wide range of companies. However, you should always speak with a business lawyer if you’re wondering how severance packages will legally impact your company.
- Wages Financial compensation based on wages is a prevalent type of severance pay. Employers typically offer terminated employees up to two weeks’ pay for each year of service. For example, an employee working for the company for two years could severance pay equal to four weeks of wages.
- COBRA The Consolidated Omnibus Budget Reconciliation Act (COBRA) affords eligible employees and their dependents to continue receiving health benefits if they are laid off or have a reduction in their work hours. Private sector employers with 20 or more employees are generally subject to COBRA provisions – meaning they must provide the option for continued coverage. The length at which an employee can remain on COBRA can vary but can generally be up to a year and a half.
- Unemployment Upon termination, employees can apply for some severance benefits which will vary by state. If the employer has signed a severance agreement with the terminated employee, they must follow through with the agreement.
- Transition Help Employers can offer employees transition services to assist departing employees in finding new employment. These options are particularly beneficial for employees out of work for an extended period. Employers also usually write recommendation letters or serve as references for terminated employees.
Unless a severance agreement is made in advance to provide specific post-employment compensation, severance packages are typically designed at the employer’s discretion. There is no obligatory severance pay, and employers are free to offer whatever benefits they deem appropriate for a terminated employee.
Common Terms to Negotiate in a Severance Agreement
While many businesses and employees correlate severance packages with severance pay, a severance package can include various components. This element is advantageous for the former employee because it provides multiple bargaining points, and it reduces the chances of wrongful termination lawsuits for the employer since severance agreements require the employee to sign a waiver.
Here are a few standard terms to know in a severance package negotiation :
- Termination Compensation Severance pay refers to the monetary compensation offered by a company following an employee’s termination. Standard pay is typically between six and twelve months’ pay at the employee’s previous salary.
- Paid Vacation Time Accrued paid time off (PTO), such as sick and vacation days, is negotiable for severance when it goes unused at the time of the possible termination. Numerous employers offer a PTO policy in their employee handbooks and may be negotiable when receiving a proposed severance agreement.
- Benefits Full-time employees can continue receiving healthcare insurance and other employer-sponsored benefits. If employees pay a monthly premium, they may negotiate with their employer to cover this cost while looking for new employment opportunities.
- Stocks If employees have non-vested stock options with their employer, the severance package may specify when they can exercise your stock options.
- Transition Services Certain employers provide access to outplacement resources that can assist employees in developing professional skills and locating a new job.
- Liability Waivers Along with compensation and benefits, severance agreements may include a clause disclaiming liability for any complaints.
- Non-Disclosure Certain severance agreements compensate employees in exchange for signing a non-disclosure agreement. Non-disclosure agreements can include anything from an employee agreeing not to share information with competitors or speaking negatively about the former employer.
- References Severance agreements may specify whether or not the employer may use this employer as a reference. Incorporating a reference clause into the severance package can aid in the employee’s new job search.
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:
- Layoffs
- 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.
Image via Unsplash by Scott Graham
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.
Is an Employer Required to Provide Severance Pay?
No, an employer isn’t required to provide severance pay, and the Fair Labor Standards Act (FLSA) doesn’t require you to provide severance pay when employees leave your company. However, if the relevant employee’s contract includes a severance package, this contract provision is valid and must be paid.
Certain states demand severance pay for workers laid off when a factory closes or an employer massively reduces its workforce. Additionally, employers may be required to provide severance pay if specified in company communications. Always speak with an employment lawyer if you have questions about how severance pay applies to your specific situation.
Lastly, in some circumstances you can offer a severance package instead of the 60-day notification requirement under the Worker Adjustment and Retraining Notification (WARN) Act for mass layoffs and site closures. You must provide a WARN notice if you are an organization with at least 100 full-time employees eliminating at least 50 from a single location. This is a complex area of labor law, and consulting legal counsel to make sure you comply is recommended.
Can an Employee File for Unemployment if they receive Severance Pay?
An employee could file for unemployment if they get a lump-sum severance payment. Severance pay in installments, on the other hand, may jeopardize their ability to collect those benefits, as they continue to receive a steady income stream. However, state laws vary, and in some parts of the country, severance doesn’t fall under earned wages for unemployment purposes, meaning it will not prevent them from collecting benefits.
If the employee is receiving continuation pay, they may be ineligible for unemployment. Continuation pay is compensation paid until a specified date, during which they don’t perform job duties. For instance, you can lay an employee off for one month without work and still pay them, making them ineligible for unemployment benefits until the continuation pay period expires. Note, continuation pay is not common and the more common practice is to offer a lump sum or structured payout severance package.
ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
