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Severance agreements: 5 things you always wanted to know

"Severance agreement" and "severance package" are common terms. But do you really know what they mean?

To spare you embarrassment over having to ask, here are answers to your questions about severance agreements.

What is a severance agreement?

A severance agreement (also known as a separation agreement) is a contract between an employer and a departing employee.

Why do companies want severance agreements? What's in it for them?

There are several motivations for employers to pay severance:

· They want to establish good will with a departing employee that they may have to deal with in the future.

· They want to let current and prospective employees know that they will be treated fairly if they are ever let go.

· In the case of layoffs, businesses may believe that paying severance decreases the odds that an employee will pursue a claim in the future.

· The employer promised to pay the employee severance in an employment contract or personnel policy.

· The employer realizes it can keep the employee from working for competitors with a non-compete obligation in exchange for the severance.

In some situations, state law might require the payment of severance.

In a contract, both sides give the other something of value. What does the employer get?

Many severance agreements include language that forbids the departing employee from filing a lawsuit or bars the employee from working for a competitor. This can be very valuable to a business.

What can be included in a severance package?

  • Money
  • Insurance (it can include life, health, and/or disability insurance)
  • Placement services to help an outgoing employee gain new employment
  • Letters of recommendation or restrictions on disclosure of information to potential employers (these can be extremely valuable to employees, and they cost the company virtually nothing)
  • Miscellaneous benefits. Nearly anything can be included in a severance package. People's requests typically are modest but can be important to them, such as keeping a cell phone, laptop, or membership to a health club.

Who receives severance packages?

Unless there is a contract or mandatory personnel policy, it's usually up to the company to decide who receives severance and how much is paid. Organizations often base severance on length of service, thus ensuring that short-term employees don't walk away with lucrative severance payments.

More questions?

If you have other questions about severance agreements, speak with an attorney who has experience with this area of employment law.

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