The Nitty-Gritty on Severance Agreements

What Is a Severance Agreement?

Severance agreements are legal contracts between employers and employees stating conditions for both parties to uphold during job termination. Severance pay and benefits are a specific type of compensation for someone being let go, and while they aren’t required by the Fair Labor and Standards Act (FLS), including a severance package speaks to a company’s culture and the care they have for employees. 

Job termination isn’t an enjoyable process for everyone, but it is the most difficult for the employee—severance packages are an ethical show of empathy and give the employer the best chance at an amicable parting. These benefits usually include elements related to insurance plans, PTO, and any other forms of payment or compensation the employee is entitled to.

The severance agreement covers the expected responsibilities and rights for everyone involved, including the standards employees need to meet to qualify for the severance benefits outlined in the contract. For example, an agreement can include a return of company property clause, which requires the employee to agree to return company-owned property to receive their severance package. Both the employer and employee are protecting what matters to them and ensuring a termination goes as smoothly as possible.

Why Are Severance Agreements Important?

When you think about it, severance agreements just make sense. It makes it much easier for everyone to understand what will happen in the event of termination without using glib assurances or misleading discussions. They provide clarity to both the employer and the employee about the terms of the termination, specifically about the reasons for the termination, the amount of severance pay, and any other benefits that the employee may be entitled to. 

With a legal contract, everything your company expects from employees is not only communicated early, but those expectations are also in writing, which employees can refer to and use to understand their options, too. When you break it down to the fundamentals, severance agreements are incredibly useful for the following reasons:

• Avoid potential lawsuits. Companies don’t want to leave their organizations vulnerable to wrongful termination lawsuits or any other kind of legal backlash. 
• Build trust. A severance agreement is a great way to make sure the employee and employer are on the same page from the get-go. When you have these discussions during the hiring or onboarding process, you are also informing employees of the protections set in place for their benefit, too.
• Protects the company's reputation. These legal contracts actually help ease tension during termination and also uphold a positive company image. They are a sign of goodwill and really set the tone for future and current employees.
• Be more competitive. Severance is a solid addition to your compensation and benefits package and makes your company even more attractive to potential candidates. 

What Is Covered in a Severance Agreement?

Not every severance agreement is going to look the same across the board, but there are some fairly standard components to include. Here are some of the most common and impactful elements that you may find in a severance agreement template.

• Date of hiring and termination: The date the employee was hired and the date their employment is terminated.
• Reason for termination: This is key to protecting the employer from any legal action.
• Severance pay: The amount of severance pay that the employee will receive. This can be a fixed amount or based on a formula.
• Paid time off: Any unused paid time off that the employee is entitled to receive.
• Health insurance: The period of time that the employee will continue to receive health insurance coverage.
• Career placement: Assistance with finding a new job, such as career coaching or job placement services.
• Liability release: An agreement by the employee not to sue the employer for any reason related to their termination.
• Return of company property: Any company property that the employee has in their possession must be returned.
• Non-compete clause: An agreement that the employee will not work for a competing company for a specified period of time.
• Confidentiality clause: An agreement that the employee will not disclose any confidential information about the company.
• Non-disparagement clause: An agreement that the employee will not say anything negative about the company or its employees.
• Non-solicitation clause: An agreement that the employee will not solicit clients or customers of the company.
• Signatures of both parties: The agreement must be signed by both the employer and the employee.

In a February 2023 ruling, the National Labor Relations Board (NLRB) ruled that employers may not offer severance agreements to non-supervisory employees that contain certain non-disparagement and non-disclosure clauses. In other words, companies can no longer require employees to sign certain confidentiality agreements as part of a severance package. 

If you’re an employer, make sure you research and understand all the nuances in your jurisdiction as you craft your severance agreement. 

When to Use a Severance Agreement

Normally, severance agreements are written up when circumstances are out of the employee's control. In fact, one study found that 46% of the employees felt that they were unprepared for layoffs and separations. The most common circumstances include:

• Layoffs. Employers sometimes must reduce their workforce due to budget cuts or other unforeseen circumstances, and a severance agreement can ease some of the financial burden placed on employees who suddenly lose their job.
• Bad fit. An employee may not end up being a good fit for the organization due to performance issues or personality clashes. In these situations, a severance agreement can help smooth the transition and prevent potential legal disputes.
• Elimination of position or department. If an employer needs to eliminate a position or department, a severance agreement can help ensure that affected employees are treated fairly and receive adequate compensation for their service.
• Company restructures. If a company undergoes a significant restructuring or merger, a severance agreement can help ease the uncertainty and provide a safety net for employees who may be impacted by the changes.

These are things that the employee can’t fix or do anything about—and often, these issues are out of the company’s control, too. Keep in mind that, just as your business isn’t legally required to offer a severance package, employees aren’t obligated to accept a severance package. The severance package should protect the company, but it should also benefit the employee. Otherwise, those employees have no reason to agree to or sign anything. Make sure employees are getting a high-quality severance agreement if you want to implement these HR practices the right way!

In a Nutshell

Remember that at the end of the day, severance agreements are a tool that companies can use to serve their organization and the immensely important workforce that they hire. Utilizing well-designed severance agreements speaks to a company’s preparedness, culture, and entire employee lifecycle.

Benefits are a huge part of an employee’s experience at your company and should offer plenty of perks and support during their employment. If you want to learn more about how to boost your employee benefits and compensation, talk with a Wellbeing Specialist today!