Employee Severance Agreements: Always Worth Considering a Near Guarantee

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“Why would I give them severance? I didn’t do anything wrong!”

And maybe you didn’t do anything wrong. But you should at least consider that paying a few weeks of severance pay in exchange for a release of claims might be preferable to paying me or somebody like me to litigate with a former employee for a couple of years, to say nothing of the time and emotional energy you and your team will spend in that process. Certainly there are plenty of situations where it is reasonable not to offer an employee severance pay, but employers should almost always at least consider the severance option.  

These points may help you through the thought process:

  • Some employees should not be offered severance, no question. If you can prove an employee hit somebody, stole from you, used illegal substances on site, etc. – no, I do not normally recommend offering severance in those situations. Your risk is low (again, if you can prove it), and sometimes you just need to stand on principle – that’s reasonable.
  • But if properly drafted, a severance agreement is as close as you can get to a guarantee against liability. When does a lawyer say that!?  Almost all of the time a severance agreement, if properly drafted, closes the file on any claims the employee might have predating the signing of the agreement.  
  • Never give severance pay without getting that release of claims in return. You will be really unhappy if you pay the severance and then the employee files a claim against your company. It happens.
  • And if you have a severance policy, make sure that the policy says that severance is contingent on signing that release agreement. (Do not implement a severance policy without talking to experienced employment counsel.)
  • There is a short list of things that cannot lawfully be released. For example, an individual always has the right to go to the EEOC, but can release their right to any individual recovery. Further, you cannot bring closure to a pending workers’ compensation claim in a routine release; in Ohio and most states that requires going through a particular process with the applicable state agency. And while it’s rare, occasionally somebody challenges the validity of a release, but the grounds for such a challenge (e.g. duress) can generally be covered in a good agreement.
  • Because that near guarantee is so valuable, employers often choose to offer severance just to avoid the possibility of the expense and distraction of a dispute, even if they don’t think they did anything wrong and/or the employee doesn’t seem to deserve it.
  • Some employers additionally view severance as a recognition of service to the company, especially for higher level executives. While severance amounts are almost always confidential as a condition of the agreement, as a practical matter a sense of what the company does when letting employees go tends to get around, and contributes to a sense within the company and in the marketplace for talent as to whether the company has treated somebody well. This is not required by law, but is a business decision some employers make. That needs to be balanced against the reason for the separation. Again to take an extreme example, I know of no company that would pay severance to an employee known to have stolen from the company.
  • Where an employee is being separated for performance that is somehow inadequate but not rising to the level of extreme misconduct, there are judgment calls not only as to whether to offer severance in hopes of neatly wrapping up affairs with the employee, but also as to the question as to whether the company is in a position to defend a claim should the employee reject the severance. If the company is not in a good position to defend a claim because its documentation is lacking, should the company take some time to put itself in a better position to defend a claim, e.g. with a performance improvement plan? There is no formula for answering that question, each employer needs to weigh its urgency to move on, the degree of risk in the situation, and of course whether it is willing to pay the cost of severance.

But at least go through the thought process before you reject the possibility; many employers regret not having done so.

This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

Barnes & Thornburg LLP is a national, Midwestern-based business law firm that strives for a more entrepreneurial and cost-effective approach both to client service and its own business. Read more Metropreneurial Legal Insights.