Severance Pay – 3 Things to Know

Photo by Nik MacMillan on Unsplash

I’ve been on both sides of the negotiation table when it comes to severance pay.  I have drafted and negotiated them on behalf of companies as well as reviewed and negotiated them on behalf of departing employees.  This experience allowed me to understand the value of providing an employee with severance pay from both perspectives.

Below are the top 3 things you should understand about severance pay.  This information is applicable to both an employer who may want to offer severance pay to an employee at termination as well as an employee who was offered severance pay along with a multi-page agreement to sign,

  1. The law does not require payment of severance unless there is a contractual obligation.

At the time of employment, employers sometimes promise to give an executive level or other key employee severance pay should the employment relationship end, usually without cause, and under certain circumstances.  These circumstances may be the business’s closing or change in ownership, reductions in force, etc.  The promise of severance pay is usually offered as an extra incentive to entice top talent.  These severance plans generally provide a set amount of severance pay based on an employee’s length of service.

However, most employees do not have such agreements.  Thus, there is no contractual obligation for an employer to offer severance pay at the end of the relationship.  Nevertheless, there are still situations that make sense for the business and employee to negotiate a severance at the end of the employment relationship.

  1. Severance pay as goodwill

There are many employers who genuinely care for their employees and when finances allow it, voluntarily offer severance pay to help buoy employees during the time of transition.  Conditioning the payment of severance upon an employee releasing potential claims also allows employers to buy the peace of mind that there are no underlying disputes that could pop up in the future.  A note of caution here is that offering severance to some employees may create an implied contract of severance pay so be careful.

As an employee, your employer may be willing to provide you with a small severance, especially if they have done so for other employees in the past.

  1. Severance pay when there is a potential claim

Oftentimes, severance pay is discussed in light of an employee’s potential claim against the employer.  These may be for issues that arose during the employment relationship such as: employee misclassification, failure to provide meal breaks and rest breaks, unpaid wages, sexual harassment, racial discrimination, disability discrimination, age discrimination, pregnancy discrimination, retaliation, etc.  In that case, it is prudent for both the employer and employee to understand the exposure and the pros and cons of entering into the severance agreement, a reasonable severance pay amount, and the terms of the release, including what claims could or could not be released by law.

Employers and employees should not take lightly the negotiation of severance pay and the signing of a severance agreement and release of liability and should consult counsel familiar with your state’s employment laws.

Contact me at (949) 529-0007 if you have questions regarding severance pay.

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In: Contracts, Employment Law, Uncategorized

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