The Importance of Reviewing a Severance Agreement

While employers are not legally required to offer severance packages, most employers provide post-termination benefits to employees in a severance agreement. Severance agreements typically include a compensation package for the terminated employee, along with employer protections. At the end of employment, an employer will often present the terminated employee with a severance package. While the severance agreement will likely provide a payment plan for a specified period of time, it will also provide protections for the employer. Among other things, the severance agreement may contain a non-complete clause and a release from any claims against the company. Oftentimes, by signing a severance agreement, a terminated employee is agreeing to give up any claims he or she may have against the employer. For this reason, it is important to carefully review the agreement and consult an attorney on any ambiguities in the agreement.

The severance agreement may contain additional restrictions within a non-compete clause. While it is likely an employee agreed to a non-compete clause at the beginning of employment, an employer might attempt to add additional restrictions to the clause within the severance agreement. This may include a larger geographic restriction, or period of time barring the employee from competition. Because a non-compete agreement may inhibit the terminated employee from finding work in a specified field, it is important to carefully review the restrictions. Further, the agreement may also affect future employment opportunities if it provides a job reference. An employer may agree to serve as a reference for the terminated employee. If this is the case, it is advisable to ask the employer for the letter and attach it to the agreement before signing. This ensures the employer supplies at minimum a neutral reference letter.

It is also important to assess any potential claims the employee may have against the employer before signing the agreement. By signing the agreement, a terminated employee may be effectively waiving all rights to bring claims for wrongful termination or unpaid compensation. Because these potential claims may give the employee leverage to negotiate a better package, it is crucial to ensure the agreement does not bar such claims in the future. If the employee was a victim of sexual harassment, or reported harassment on another employee, there may be a claim against the employer. In this case, the employee would not be advised to sign the agreement.

When reviewing a severance package, there are several other considerations to keep in mind. The agreement will likely outline a severance pay schedule. Pay schedules vary by company, but most companies offer a payout within a month and a half after signing the agreement. However, there is no specific schedule an employer must follow. Compensation may be paid over a period of time, or can be offered in a lump sum payment. The terminated employee may prefer a lump sum payment immediately upon termination. In addition to a continued salary, some agreements may provide for health insurance benefits to continue. It is important to review whether the insurance will continue through the existing insurance plan, or under COBRA reimbursement. Additionally, some employers may not offer to extend health benefits. It is advisable to ask the employer to continue health benefits throughout the salaried period. Depending on the employee, the agreement may also discuss pension and stock options. If an employee has qualified or unqualified stock options, the company may have a right to buy back the stock.

Another consideration when reviewing a severance agreement is to ensure the terms remain confidential after the employee leaves the company. Because disclosure of certain terms within the agreement may have an adverse effect on future employment, it is important to ensure these terms remain confidential. Lastly, an integration clause will prohibit the employer from claiming the agreement is incomplete. An integration clause demonstrates that both parties have agreed to the agreement, and that the agreement represents a final expression of the negotiations.

Severance packages vary between companies and employees. While most severance packages will outline a payment schedule and protection against future claims, there is no general format a company is required to follow. It is important to carefully review the document before signing, and ensure the terminated employee’s rights are properly negotiated and provided for in the document.