What is a Severance Agreement?

When a relationship is severed, this means that the ties between parties are cut. A severance agreement, commonly known as a termination agreement, is a document that outlines how the connection between an employer and its employees will be cut. Such agreements can be beneficial to both employers and employees.

A severance agreement can address numerous issues regarding termination of employment. The contract may state how much notice an employer must give an employee before laying her off. It may state the procedure that must be followed before the employee can be fired. The purpose of this type of contract is for both parties to agree what will happen when their relationship comes to an end.

Some severance agreements include a clause that outlines an amount of money, known as severance pay, the employee is to receive if her employer lets her go. There may be conditions attached which affect the amount she will receive. The agreement may even include conditions that can result in an employee forfeiting all of her severance pay. To the contrary, the severance agreement may impose obligations upon the employer in addition to the termination pay. For example, the employer may be required to provide medical insurance for 90 days following termination.

One way a termination agreement can equally benefit the employer and employee is by eliminating the unknown. If an employer is sued, the judgment will generally be left to the discretion of the court and could be substantially greater than terms outlined in a severance agreement. Likewise, many employees are not fully aware of their rights and abilities and, without a severance agreement, risk having their employment terminated and receiving nothing. However, in both instances these agreements can lead to false security. There have been instances where employees who had previously agreed not to sue did so anyway and there have been instances where companies used loopholes to avoid fulfilling the terms of their agreements.

In many jurisdictions, courts will not view such agreements as valid if they are not in writing. It is generally unlawful to force a person to sign a severance agreement. The signing of severance agreements should be voluntary. The agreement should include a clear description of the terms. Anyone who is given the option to sign one should also be granted adequate time to review the terms and receive legal advice.

Severance agreements often involve an employee forfeiting or potentially forfeiting some of her rights to the benefit of the employer. This is the reason that compensation is often attached; it increases the chance that a person will think of what she has to gain instead of what she has to lose. For example, many of these contracts include a clause where employees waive their rights to sue their employers.