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What Are Severance Agreements?

Simply, a severance agreement is a contract between an employee and an employer which terminates the employment relationship in exchange for employee benefits and the waiver of an employee’s right to sue. An employer has no obligation to enter into a severance agreement or pay an employee in exchange for the employee leaving the company. Employers will often enter into these contracts to minimize the risk of future litigation. This means all potential claims or disputes are settled between the parties. An employee who receives a severance agreement or who is looking to end the employment relationship, but believes they may have a basis to enter into an agreement, should always consult or retain an employment lawyer to help negotiate and maximize what an employee ultimately receives. Severance agreements usually consist of:

Severance Pay
This is where a lawyer can be very helpful in negotiating more weeks of pay than what an employer might initially offer. Additionally, how and when the money will be paid is another negotiation point. Some employers pay a lump sum, others want to pay in installments. Sometimes bonuses the employee would have received, can be included in the negotiation. Severance pay is subject to all applicable withholding taxes.

Paid Time Off/Vacation
The severance agreement should also cover any accrued but unpaid PTO or vacation pay.

Health Insurance/Medical Benefits
Under COBRA, a terminated employee is entitled to continue health insurance coverage for a period of time. Who bears the cost of the premium is another point which can be negotiated in the employee’s favor.

Stock Options
If an employer offers stock options or performance shares, an employee can ask that those shares vest or negotiate the payment of the stocks.

General Release of Liability
Some agreements tend to be very one sided. The employer is released from all potential claims, known or unknown. It is important that the release be mutual in order to protect the employee from future claims or litigation.

This is essentially a clause that says the employee will not say anything bad about the employer or its business and practices. Again, this is a clause that should be mutual, as the employer will receive inquiries from future employers. An employee does not want to be in a position which could jeopardize any future employment.

An employer will generally want to keep the severance agreement and its terms confidential, especially where money has been paid. An employee will want this clause to have exceptions so they are able to disclose the settlement for tax or legal purposes.

Non-compete/No Solicitation
Employers may sometimes add a provision that says an employee is not allowed to try and take any clients or business away from the employer. The non-compete clause will limit the employee’s ability to work in the same industry, or within geographical boundaries, for a specified amount of time. The amount of time and the geographical boundaries are typically negotiable.

Every agreement is different and involves different circumstances. The above points are generally what is contained in a standard agreement. It is important an employee who is seeking to end an employment relationship or is given a severance agreement to seek legal representation to evaluate the particular facts surrounding the employee and the employment relationship.

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