Severance Packages and the Law | Understand Your Severance

Surprisingly, the law does not mandate employers to provide terminated employees with severance packages.  An employee of 40 years can be fired and is not entitled to a severance package of any kind – not even two weeks of pay.  Employers offer severance packages as a matter of corporate convenience.  A severance package is a simple exchange under contract law where the employer gives the fired employee severance pay in exchange for the employee giving up her right to sue.

While most people believe that employees are entitled to two weeks’ pay per year of service, that is merely a common formula used by large corporations.  Employers offer severance packages for the convenience of knowing that, once accepted, the company will not face the cost and distraction of a lawsuit.

But many severance packages impose other obligations on employees.  Some require the employee to cooperate with the corporation in the future – without additional compensation – for litigation or government investigations.  That could mean taking days away from your new job without pay to cooperate with your former employer’s lawyers, or even testify at a trial or hearing.

Other severance packages prohibit the employee from working in his occupation for up to two years.  These restrictions are called non-compete clauses or agreements.  Essentially, the law permits an employer to ban you from working for its competitors for a period of up to two years.  In the recent past, the courts required these non-compete agreements to be reasonable in geographic scope, such as a 50-mile radius or a few states where the company operates.  But in the last few years, courts have recognized that the ease of technology permits companies to compete worldwide and, consequently, are enforcing non-competition agreements that are global in scope.

Given the rights and responsibilities implicated in a severance package, it is important to contact an attorney before signing a severance agreement.