Severance Agreements For Executives: Should You Use Them?

A severance agreement is a great way to ensure that your organization is protected from a wrongful termination lawsuit when you let staff members go. If done correctly, a severance agreement can also help reduce the ill will a laid off employee might feel toward your organization as well by offering them a comprehensive package that contains a respectable payment and outplacement services.

But what about severance agreements for executives? Should you always offer senior staff members a severance agreement? How much should you pay them?

These questions come up a lot with severance agreements and the short answer is that it highly depends on your organization and who you are letting go.

Let’s explore a little further.

As a refresher, a severance agreement is a legal contract between an employer and an employee that goes over the terms and conditions of the employee’s termination. Typically, the employer offers the employee a severance package that contains a lump sum payment, usually based on the employee’s income, to entice them to sign away the right to take them to court over a wrongful termination.

A severance payment, also known as ‘consideration,’ is usually based on the employee’s salary. If you are unsure how to calculate severance payments, check out our free resource:

Download our Severance Pay Calculator

Determine the correct severance pay based on industry standards.

Download

In order to craft a great severance agreement, you need to work closely with your legal team to ensure that you are compliant with all local, state, and federal laws as well as the terms and conditions laid out by the EEOC.

If done correctly, your severance agreement will do a few things: negate the chance of your employee taking you to court, help you keep your hard-earned reputation intact during a layoff, and also help the employee by offering a severance payment that allows them a brief window to find a new role in another company.

There is no law that requires you to use a severance agreement at all. However, using one is always a good idea if you think the person you are letting go is in a protected group or a has a high risk of taking you to court.

Remember, there are a lot of things you can and cannot do when it comes to severance agreements. Again, you need to check in your legal team to make sure you are using the right language and that you are always following all of the regulations that protect older workers.

When it comes to severance agreements for executives, we tend to say that a severance agreement should always be used even though you technically do not have too.

Why?

Because executives will often expect a severance agreement and a severance payment when they are let go from their current role. They also are a group that might take you to court if you wrong them.

In other words, it’s just a great precaution if you want to have peace of mind plus it is expected by the executive.

We also recommend that you consider using a severance agreement for all employees who are let go from a layoff or RIF because it shores up your legal defense if anyone should happen to file a claim against you. It’s better to be safe than sorry, especially when it comes to lengthy court cases that seriously impact your bottom line.

The shortest answer: you should provide a severance agreement to executives.

For executives, you also should include more than just a severance payment when it comes to offboarding them from the company because they will need extra support finding a new executive role in another organization.

This is where outplacement comes in handy.

Outplacement is a service offered to outbound staff members that helps them get back to work faster by providing them the support of a job coach who is specifically trained for their role while also providing them digital tools to make the job hunt as easy as possible.

In today’s world, the job hunt is mostly done online, meaning that networking, finding a job posting, and getting your foot in the door is a lot different than the methods of yesterday.

For an executive, this largely means that they will have to start using new networking tools like LinkedIn where they can harness the power of their personal networks to find new work.

By finding an outplacement provider that specializes in finding roles for executives, you can give them a leg up on the competition, allowing them to find a job faster and start their next role.

This does two things: first, it shows that you, as an organization, care about the person’s continued success even when they make their exit out of your company, and two, it helps cut down the amount of resentment an ex-employee can feel towards your organization overall.

Reputations can be lost instantly because of placed like Glassdoor and other reporting sites that allow employees to anonymously report how they feel about a company they worked at. With that in mind, an executive knows that inner workings of the organization more than anyone else and can do some serious damage if they want to.

Most executives will handle the layoff professionally and will not go after a company for a perceived slight. However, it’s always a good idea to just make sure that they are taken care of in a way that is respectful to avoid the potential situation altogether.

This is why we always say it is a best practice to offer outplacement services alongside a solid severance payment and package. It’s just not worth the headache to not provide it.

While there is no legal requirement for you to offer a severance agreement to an executive when they leave your organization, you should anyway.

By doing so, you will protect yourself from a potential lawsuit while also providing for the outbound employee who will now have to find a new role elsewhere.

We recommend providing a respectable severance payment alongside outplacement support to ensure all of your bases are covered.

As with any layoff or RIF event, it’s vital that you discuss your severance agreement and layoff practices with your legal counsel to ensure you are compliant with all local, state, and federal laws as well as the rules set forth by the EEOC and other groups that work with protected classes.

If you do, you will rest easy knowing that you are protected and that your employee is well on their to finding a new role. It should be a win-win for both parties involved.

Josh Hrala

Josh is an HR journalist and ghostwriter who's been covering outplacement and offboarding for over six years. Before pivoting to the HR world, he was a science journalist whose work can be found in Popular Science, ScienceAlert, The Huffington Post, Cracked, Modern Notion, and more.