Five Key Elements Every Severance Agreement Should Include

Letting an employee go is a difficult task for many employers. Whether it’s part of a layoff due to downsizing or an outright termination for cause, ending the employment relationship can be a stressful experience. In addition to often strained or hostile interactions with a departing employee, many employers also have concerns about the termination process itself and whether they are open to any liability. This is why a strong separation agreement is essential.

A severance agreement provides the conditions of an employee’s termination and gives clarity to both sides. It lays out the obligations of both employer and employee, and provides a description of the legal ramifications should the employee violate the terms of the agreement. The severance agreement also serves to remind an employee of the conditions of any governing employment contract.

Employers should be sure to address the following critical elements in their severance agreements:

  1. Compensation Terms: The agreement must lay out the final compensation the employee will receive, including any owed regular or holiday pay. If the employee is entitled to a severance payment, outline those terms out clearly (i.e. a month of pay for every year of service).
  1. COBRA: Describe the process for the employee to continue receiving health care benefits under COBRA and how long they will be kept on the company’s plan.
  1. Confidentiality and Non-Disparagement: The employee should agree to maintain confidentiality as outlined in the original employment agreement regarding disclosure of sensitive company information. This confidentiality should be extended to the terms of the severance agreement itself. Also include language barring the employee from publicly disparaging the employer. Clearly outline the legal penalties for breaching confidentiality or disparaging the company.
  1. Non-Compete: Remind the employee of any non-compete clause that was part of his or her original employment agreement. Restate its terms, including how long the non-compete period lasts and the specific penalties for violating it. Note that non-compete clauses are not enforceable in all states, and certain terms, such as severely restricting an employee’s right to earn a living, can render a non-compete completely unenforceable.
  1. Release of Claims, Covenant Not to Sue: As noted above, the main purpose of a severance agreement is to protect an employer from the threat of litigation and other liability. As such, the agreement should include a release of claims by the employee and a covenant not to sue. The employee agrees to this in exchange for the compensation, severance, and other benefits outlined in the separation agreement.

While terminating an employee can be hard, having an effective severance agreement ensures the process is handled correctly. Some advanced preparation in drafting the right agreement can go a long way to preventing problems and mitigating risk.

Posted in Employment Law.