A Brief Guide to Severance Agreements (Plus Downloadable Resources)
May 23, 2018 by Josh Hrala
When someone exits your organization via a layoff or other reduction event, it’s standard practice to use a severance agreement to ensure that all of your legal bases are covered.
Despite the fact that almost every organization uses severance agreements, though, they can differ quite a bit between organizations. What works for one company may not always work for another.
Because of this, we have put together this high-level guide to get you started either thinking about adding a severance agreement to your offboarding process or looking to make sure yours is doing all it should for your organization.
A quick note: like any legal document, it’s vital that you work closely with your legal team or counsel to make sure that your document complies with all local, state, and federal laws. We are not lawyers, and the advice in this guide is all about what to consider what best practices are out there.
With that said, let’s jump right in:
What Is a Severance Agreement?
A severance agreement is a legal document that goes over all of the responsibilities and rights of each party involved – the employee and the employer. The document lays out all of the benefits offered by the company – including pay, insurance, etc – while also ensuring that the employee was not wrongfully let go. Some businesses also use a severance agreement to detail non-compete issues.
In other words, a severance agreement – coupled with severance pay – makes sure that the employee agrees with the terms that they were let go under. They agree that they understand how their insurance, pay, and other benefits will change once the exit is made, and they also agree that they will not file a lawsuit against the company for being wrongfully terminated.
In return for signing the document, employers typically provide severance pay, which you can learn about in more detail here. In short, severance pay is meant to help ease the transition outside of the company – by providing a continued salary for a certain period of time during the job hunt – and also provide an incentive for the employer to sign the agreement.
What’s the Purpose of a Severance Agreement?
The main purpose of a severance agreement is to make sure that the exiting employee will not file a wrongful termination lawsuit against the employer. By having a legally binding contract, the employee cannot take the employer to court.
On the other hand, providing severance pay to an employee – though it helps get the contract signed – can be seen as a gesture that the employer cares about the future success of the employee. No on wants to be kicked out of their job with no pay to support themselves of their families, despite the fact that ‘at will’ employers can do so.
By providing pay and a contract, you can ease tensions and make sure that your organization is being upfront about health insurance changes, benefits changes, and all of the other things that switch when someone is let go.
We highly recommend adding outplacement services as a benefit in your severance agreement, too. That way, your employee can work with a coach and use specially-crafted job search tools to get back to work faster than searching on their own.
Terminating an employee is a stress ordeal for everyone involved. By providing a decent lump sum severance payment and outplacement, you can rest assured that your employee is set up for future success.
For the employee, these efforts show that you – the organization – cares about their well-being and that their work for your business has not gone unnoticed. In today’s digital world, a reputation can be lost within seconds. Make sure that you are doing all that you can to protect it. Also, helping your exiting staff is simply the right thing to do.
Do You Need to Use a Severance Agreement?
Sadly, there is no simple answer to this question. In short, no you do not NEED to use a severance agreement. There is no law that says a severance agreement MUST be provided to outbound staff members.
However, like we mentioned above, a severance agreement negates lawsuits in exchange for a payment. By having an employee sign a severance agreement, you ensure that they will not take you to court.
So, while it may not be a thing you offer all of your employees, you should definitely consider it when it comes to situations that truly want to avoid.
“Is the individual in a protected category under a discrimination law? What is the likelihood this person will be replaced by someone not in a protected category? Has the employee recently engaged in protected activity, such as taking leave under the Family and Medical Leave Act (FMLA), filed a workers’ compensation claim, complained of sexual harassment, requested an accommodation, or acted as a whistle-blower against her employer?”
Buckley goes on to say that if you are dealing with these types of employees, it’s worth going the extra mile to make sure that they understand the terms of their termination and that they agree with those terms by signing a severance agreement.
By doing so, you can ensure that you are legally in the right and will not face a lawsuit later on down the road.
“For situations with those complicated factors involved, the employer should consider paying for the peace of mind in avoiding ligation which could arise because the employer terminated the employment relationship. If the situation does present with any of those risk factors above, then a severance agreement should be utilized,” she writes.
The takeaway here is that you should use severance agreements when you want to avoid future lawsuits. You can always use them for every person you terminate, too, which gets you in the habit of using them and will always protect you.
But how should a severance agreement look? What needs said inside it?
Let’s take a brief look.
What You Should Include In Your Severance Agreement
This section largely depends on your company. It also needs to be reviewed thoroughly by your legal team to ensure that it cannot be dismissed in court. Yes, you heard that right. If you force someone to sign a severance agreement or do not detail the terms of the agreement in the proper way, an employee can take you to court even if they have signed the document and sue you anyway.
Because of this, we will only go over the high-level things you need to cover in a severance agreement to get started. The exact verbiage, terms, and other legally binding bits will need the help of trained attorney to ensure you are compliant, especially when it comes to protected workers (workers over the age of 40, for example).
Consideration is an offering from the employer to the employee to sign the document. This, in short, is the severance pay. However, for it to be a legal ‘consideration,’ severance pay cannot be something that the employee will receive even if they do not sign the agreement.
For example, if your company has a policy that says all terminated staff will get a lump sum payment when they leave to help with their future job hunt, that doesn’t constitute consideration. It has to be a special payment that is specially there as an incentive to sign the document.
“Consideration is the legal term for an exchange of value. A contract is not enforceable unless there is a tangible exchange of value. In a severance agreement, the exchange of value is usually an extra payment to the departing executive in exchange for a waiver of the executive’s right to sue the employer. It is important that you understand this part of the severance agreement.”
You should detail how long the employee has to consider and sign the document. This largely depends on if the worker is over or under 40 years old. If the employee is over 40, they are entitled to 21 days of consideration and then, after signing, they have 7 days to revoke the offer.
We suggest that you handle all employees this way. Make sure you are compliant with whatever deadline you choose. Again, this is where your legal counsel comes in because you have to explicitly state all of these rules and terms in a way that your employee can understand.
Your agreement should state in clear language how the employee’s benefits will change once they are terminated from the organization. This means explaining their healthcare changes, their retirement changes, and anything else that could change.
You should also take about the benefits extended to the employee for signing, such as severance pay and outplacement services.
Be clear and concise. There is no point trying to amp up how great these benefits are and misleading someone in this document is a sure-fire way to get sued.
Tell Them to Speak to Their Lawyer, Too
It should be clear by now, but it’s vital that the person signing the severance agreement fully knows what they are signing. For them to do so, you should always tell them to have the document looked over by their personal attorney. That way, they have a more nuanced idea of what the document is and are signing with the full knowledge of everything it entails.
There is no point trying to dupe someone while signing a severance agreement. It needs to be a well-crafted, easy to understand document that the signing party fully agrees to. Otherwise, it can be dismissed in court and open you up to a bunch of negative things – most notably a lawsuit that can drag on for years and cost you tons of money for a defense.
Things Not to Do With a Severance Agreement
It’s actually easier to list off things you shouldn’t do when it comes to offering a severance agreement than it is to go over everything your organization needs to include. What to include is often dictated by who the person being let go is, what group they fall into, and what terms you want to set. This is done with the help of your management, HR team, and legal counsel.
Here are a few things to completely avoid:
- Do not bar them from filing a complaint with the EEOC
- Do not use jargon to make the document overly complex and hard to understand
- Do not exaggerate what you are offering the employee
- Do not forget to reference the ADEA
- Do not expect them to sign on the spot or pressure them to do so
- Do not obstruct the employee’s ability to file a discrimination complaint (this is similar to EEOC compliance)
There are, of course, more things to consider, too, but this is a good start. Like we keep saying, your attorney will be able to explain all of this to you and go over what you definitely need when crafting an iron-clad document.
What to Include In a Severance Package
Now that we’ve covered a lot of what goes into a severance agreement (as in the document itself and when you should use it), the next step is to know what to offer the employee to get them to sign.
This is where a bit of flexibility comes in as long as it falls into the ‘consideration’ legal definition above.
Like any reduction event – voluntary or otherwise – you want to make a package that will do two things: get your employee to sign the agreement and also set them up for future success outside your organization.
The thing everyone knows about severance packages is that they often include a lump sum payment that is generally based on employee salary. For example, you could offer the employee six months of salary or two months or one month. It all depends on your funds and also the seniority of your staff members.
It stands to reason that if someone has worked for your organization for over a decade that they get a better package than someone who has worked there for under a year. We’ve made a calculator to help you figure out how much severance pay you should offer individuals.
You can check that out here:
Whatever method you decide to use to calculate severance pay, you need to make sure it is enough that your employee will want to take it. If you offer too low, you run the risk of the person feeling insulted and uncared for, leaving you open to the option of them not signing your agreement and being upset all at the same time.
One of the best ways to get around this is by offering other forms of support, too. We suggest that everytime someone makes an exit from your organization that you offer them outplacement services to ease their transition.
Outplacement is a service offered by outside organizations that help get your staff members back to work in a new, fulfilling role faster than them going it alone. The best outplacement providers offer one-on-one coaching coupled with digital tools like keyword tracking to get around applicant tracking systems that can stop a job application before it is even read by a human.
What this does for you, the employer, is help negate all of the bad feels an individual might feel about your organization. It shows the employee that you care about their well-being enough to put them through a program that can get them back to work even though they are no longer working for you.
This saves your reputation while also going a good deed for your employee. The job hunt can be immensely stressful and if your ex-employee has no support they can hold a grudge against your organization.
Of course, if they take your severance package, they will not be able to sue you if you do everything right. However, in today’s world, nothing is stopping them from messing with your organization’s reputation by writing articles anonymously online or lowering your Glassdoor score – all of which are vital for a company to succeed in the information-driven world.
You can learn more about finding outplacement providers, what they should offer, and how much they should cost here:
How to Implement a Severance Agreement and Package
Okay, until now, we have generally been going over the planning phase. Proper planning is vital if you want your agreement to work the way it is intended. After all, without it, you can open yourself up to lawsuits and other negative impacts.
But now that we have covered that phase, how do you actually implement a severance agreement? Where does it fall when you lay someone off?
As we went over in our complete guide to layoffs, a severance agreement is generally given to the employee during the notification meeting. This meeting occurs after the person is notified to meet with HR.
Generally, these meetings are short and to the point. There is no need to make small talk or walk around what is about to happen. You need to lay someone off, they know it, get it over with.
In this meeting, you will need to go over a few things. First, explain why the layoff is happening. After that, let the employee say what they need to say (within reason). Actually listen to what they are saying. Chances are that they are going to be very candid with you in this moment and you can learn a lot about your organization from paying close attention here.
After you explain the layoff and let them make their peace, explain when they’re last day will be and bring out the severance agreement. Your HR manager will likely handle this process.
Go over each step of the severance agreement, take questions from the staffer (if they have any) and provide them a copy to take to their lawyer. Explain the deadlines and everything we have discussed previously. Do not try to pull one over on your employee here. You need to make sure you are explaining the document in a way that they understand.
While going through the document, explain what benefits will be extended to the employee if they sign: payment, outplacement, etc.
Explain how their healthcare plan will change, retirement, and other benefits that may extend after they leave or be canceled.
We’ve found that there are generally two people of reactions to this meeting (though that doesn’t mean that they’re the ONLY two): one is where the person has a lot to say and a lot of questions and the other is when someone just wants to get out of there as fast as possible, which makes sense because this is an extremely stressful setting.
Expect either reaction. If you are having a bigger layoff with multiple people being let go, we highly suggest that you have outplacement support on site to immediately help the employee get into the job hunt, giving them a better chance of finding a job in a timely manner.
Severance Agreements: The Takeaways
We covered an absolute ton of information here. Let’s have a brief recap to close out.
A severance agreement is a legally binding contract between an employer and an employee that details the employee’s termination, which also waives the employees ability to sue for wrongful termination.
Severance agreements can be used for any staff member you are letting go, though it is not mandatory. Top HR experts suggest using severance agreements when letting go individuals from protected groups or other individuals who have a higher likelihood to take your organization to court.
When crafting a severance agreement and package, you need to make sure that you are complying with all local, state, and federal laws. Lean heavily on your legal counsel to make sure all of these aspects are covered.
The wording of your severance agreement needs to be clear and concise. Do not try to trick or confuse the person being let go. This will only lead to the exact trouble you are trying to avoid with the agreement in the first place.
The agreement should cover how the employee’s benefits will change, what their severance payment will be, and what benefits are extended to them by taking up the agreement (such as outplacement).
You should sit down and go over the agreement with the employee during the layoff notification meeting, which you can learn more about here. Explain the agreement in detail and provide a copy to the employee for them to take to their lawyer for review. If the individual is over 40 years old, they are guaranteed 21 days to review the agreement and can revoke it up to 7 days after signing. We suggest just making this standard for everyone.
If done correctly, your severance agreement should completely negate the possibility of your organization getting sued over a termination. However, to get them to sign and to make the contract legal, you need to offer something in return for their signature. This is called ‘consideration’ and it is usually a lump sum of money known as a severance payment.
Calculating severance payments can be tricky. We’ve made this easy to use calculator for you to get started. Also, we highly recommend providing outplacement as a service for your outbound staff, too, because it gets them back to work faster and takes a lot of the stress out of the situation for both parties.
Your severance agreement should be a living document that you adjust all of the time. As laws change, which they do quite often, you need to make sure you’re always compliant and up-to-date. Again, work closely with your legal team to ensure you have everything covered.