Using Severance Agreements

“I am firing an employee later this week and heard I should have him sign a severance agreement. What’s the purpose of a severance?”

My HR Survival Tip

The basic purpose of a severance agreement is to document the terms for an employee to leave your employ. It’s typically an exchange, such as a special payment to the employee in exchange for their agreement not to make any claims against the company. However, severance packages can be overused and misunderstood.

You typically don’t use a severance agreement unless you have a reason to believe the employee may be litigious, you worry the employee may have a reason for a claim or you’re willing to pay someone to leave the company. If your termination process is solid, you may never need to offer a severance.

A severance agreement cannot stop an employee from filing a claim against unpaid wages or other legally-entitled pay. Make sure you give the employee any wages and unused vacation/PTO pay due at the time of termination. The severance payment is a separate thing and is usually paid later based on the signing of the agreement.

legalA good severance agreement is created by an employment law attorney and includes:

  • The total compensation you are offering as severance, which may include money, COBRA payments, or other cash-related items;
  • Any special terms, such as the employee’s help during a transition period;
  • Lots of legalese about the employee not being able to come after you and other necessary information;
  • Possibly a “no disparagement” clause so no one speaks badly of the other or the company; and
  • If the employee is over 40, there must be a clause about the timing of signing the agreement and a revocation period before the severance check is actually mailed.

Don’t expect the employee sign the agreement at the time you present it. Give him at least 3 days to look it over and consult with an attorney. If he’s over 40, he’ll legally have up to 21 days to review the agreement. The employee may choose to sign the agreement right away but it can look like coercion if you do anything to push him to sign it that quickly.

The most important thing to remember is, if getting this agreement signed is important to you, you’ll need to offer enough of an incentive that it will be hard for him to turn down your offer!

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