Frequently Asked Employment Law Questions - Separation agreements and severance packages

A separation agreement is a written contract that sets out the terms of an employee’s separation of employment.  A separation agreement will usually include a release of claims against the company by the separated employee in exchange for the payment of money to the employee by the employer.  This payment is commonly referred to as separation pay, severance, or a settlement payment.  There are many important non-monetary terms and conditions commonly contained in a separation agreement. 

Separation Agreements from the Employer’s Perspective

From the employer’s perspective, some key provisions of a separation agreement include:

(1)  A release and waiver by the employee of all claims against the employer;

(2)  The withdrawal of all pending claims, charges or lawsuits against the employer by the employee;

(3)  An agreement for the employee to not sue or bring any claims against the employer;

(4)  A confidentiality provision requiring the employee to not disclose the terms or fact of the separation agreement;

(5)  An affirmation of the employee’s obligation to not disclose confidential or proprietary company information;

(6)  A non-disparagement clause, in which the employee agrees to not make any disparaging statements against the company;

(7)  A clause setting out the employer’s remedies in the event the employee breaches the separation agreement, such as the recovery of the employer’s attorneys’ fees and litigation costs from the employee in the event of litigation; and

(8)  An agreement that the employee will not seek reemployment with the employer.

Separation Agreements from the Employee’s Perspective

From the employee’s perspective, some key provisions of a separation agreement include:

(1)  The payment of the separation, severance, or settlement amount;

(2)  The payment of all outstanding compensation and benefits due;

(3)  A neutral reference clause, in which the employer agrees to only release dates of employment and positions held to prospective employers, and to not release any other information about the employee’s employment or separation of employment;

(4)  A non-disparagement clause, in which the employer agrees to not make any disparaging statements about the employee;

(5)  An agreement from the employer to not oppose any claim by the employee for unemployment insurance benefits;

(6)  A release by the employer of all claims against the employee;

(7)  An agreement by the employer to not sue or bring any claims against the employee; and

(8)  A pre-written, pre-signed positive letter of reference on the employer’s stationary, attached to the separation agreement.

A severance package is a combination of money and benefits that an employer pays to a separated employee.  A severance agreement is very similar to a separation agreement, but the amount of severance pay and benefits is usually determined by a specific employment contract, severance policy, or severance plan.  A severance package often contains several different components, such as a base severance pay amount, payment of accrued bonuses and incentive compensation, other compensation and benefits, and expense reimbursement.

No.  An employer has no legal obligation to pay an employee severance, unless there is a contract, severance policy, or severance plan that creates a contractual entitlement to severance pay.  Some severance plans provide that severance is within the sole discretion of the employer to pay or not pay.  Severance plans may also disqualify an employee from any entitlement to severance for various reasons, most commonly termination for cause or voluntary resignation.

Almost all employment contracts and severance plans require the employee to sign a release and waiver of all claims against the employer as a condition of entitlement to the severance.  On rare occasion, some employment contracts or severance plans provide for unconditional severance.

No.  While most severance plans contain a formula to determine the amount of the severance payment (often based upon years of service), the formula does not create a cap on the amount of severance pay that may be obtained through severance negotiations.  A severance package may be renegotiated in order to increase the amount of severance pay and benefits.