Severance Agreement | Understand Your Compensation Package in Case of Employment Termination

Some job applicants may be able to get a better deal on their wages and benefits once they land the job. However, some may not recognize how to negotiate such benefits while leaving. It is common for employers to provide a severance agreement that specifies the financial terms under which an employee might depart.

Severance agreements could be a godsend for employees looking to change their career paths. The most important aspect to understand is that a severance agreement is a legally binding contract. You must comply with the entire contract if you sign it. Therefore, reading through all the terms is important to understand the agreement.

What Is a Severance Agreement?

A severance agreement is a contract between an employee and an employer that outlines the employee's compensation package in exchange for employment termination. For example, an employee may lose their job because of layoffs or other reasons. The document addresses the rights and obligations of both an employee and an employer. In addition, it outlines the severance benefits that an employee may be eligible for and the procedures they must take to qualify for those benefits.

Several job applicants are familiar with negotiating their salary and perks when under an employment contract. However, they don't seem aware they may do so when they leave a company. It is common for employers to provide a severance agreement that stipulates the financial terms under which an employee might leave their job. Engaging with an employer about what you want in terms of compensation, benefits, and legal representation is an important part of negotiating an arrangement that works for both parties.

two people looking at the contract on the table

What Should a Severance Package Include?

Many businesses provide severance pay to lessen the likelihood of facing unnecessary termination claims, even if it is not a requirement by law. However, you should consult an employment lawyer if unsure how severance payments will affect your company.

Typical severance packages include:

Financial Compensation Information

Wage-based compensation is a common form of severance pay. Employers often offer two weeks' salary for every year of service. For example, a two-year employee could receive four weeks' compensation as severance.

Unemployment

Employees might request severance benefits upon termination. The employee's request for severance benefits may be granted or denied by the company. 

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Employers with at least 20 employees must offer the option of COBRA continuation coverage as part of the group insurance plan as required under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Transition Support

Employers can help departing employees find new jobs using transition services. Employees who are out of the workforce for a long duration can benefit from these options. Recommendation letters or references from former employees are also common.

Severance packages are generated at the employer's discretion unless an agreement is struck in advance to give precise post-employment remuneration. Employers are free to provide whatever benefits they see fit for a terminated employee, and severance pay is not obligatory.

a woman looking at the document in her hand

What Are the Components of a Severance Agreement?

A severance agreement is a sophisticated legal contract explaining what the employee would receive for consenting to their employer's separation conditions. Employers should avoid the repercussions of each clause to ensure that an employee's termination is finalized and their choice is driven after they leave the job. Consult with an employment attorney for assistance in selecting what components to include in a severance agreement contract for your company.

Separation Reason

Many severance agreements specify the employee's firing or resignation cause. The severance agreement says the company and employees desire to settle their concerns and separate professionally.

Severance Pay

Severance payment is the main benefit of a severance agreement. It can be a fixed percentage of an employee's wages for a pre-determined service period or a substantial lump sum severance payment.

Age Discrimination in Employment Act (ADEA) Information

All severance agreements for employees above 40 must reference the ADEA to inform them of their constitutional rights.

Return of Company Property

Severance agreements might specify how and when an employee must return company property if it is in their possession at the time of termination. It ensures a smooth transition and wraps up loose ends when terminating someone.

Paid Time Off

Severance packages can include unused vacation and paid time off. Some employers might let the employees use accrued vacation and sick leave benefits before they leave. Other employers might reimburse employees for the payment they would have saved by doing so while they were fully eligible.

The Timeline

Severance agreements should include the employee's hiring and termination dates and give them time to accept or reject them.

Liability Waiver

The severance agreement outlines the benefits employees would get if they sign it. However, it also specifies the conditions under which they will be eligible to receive those benefits. The court will take no legal action against the corporation if the employee decides not to.

Reference Check Clause

A reference check clause may safeguard prospective employers from receiving a bad reference from the company. However, some employers include a positive reference in their contract and might offer the employee a reference letter for their approval.

Health Insurance

Continuing health coverage is an essential perk that might help employees find a new company to endorse their medical benefits. The Consolidated Omnibus Budget Reconciliation Act  (COBRA) (a federal law) grants employees the right to continue receiving medical benefits for up to one and a half years following their termination.

Non-Compete Clause

Non-compete clauses may be limited to a specific geographic area or have an expiration date. In addition, a former employer can incorporate a non-compete clause in their employment contracts to ensure that their former employees will not use company resources to compete with their firms.

Discretionary Information

Severance agreements include a section outlining the employee's post-signing disclosure rights. Certain corporations make the agreement confidential, so employees can't discuss its details. It may also include information about the company's customers and internal operations.

Non-Disparagement Clause

A non-disparagement clause states the employee can't disclose negative corporate information for a specified time. In addition, the severance agreement must advise employees of their federal law rights and to have the document evaluated by an attorney. Comprehensive severance agreements safeguard the employers and their employees throughout staff transitions. Employers can reach a mutually beneficial agreement on each clause by negotiating with employees to minimize the tensions involved with terminating an employee.

Career Placement

Companies offer outplacement and career guidance to help laid-off workers find new jobs. Such a benefit shows your concern for your employees' well-being outside of their workplace and gives them the security of having some career stability.

a contract on the table and a person holding a pen

How Are Severance Packages Calculated?

Employers determine the compensation for the departing employees by the length of their service. You should also consider the employee's ranking or status when calculating the amount. Employers create their formulas based on years of service, such as two weeks of severance compensation every year.

How is severance compensation calculated? That is specified in the Employment Standards Act. First, the employee's monthly salary is used to determine the per-day wage for calculating severance pay by dividing it by thirty (30) days. Next, the daily wage is multiplied by 15 days and then by the total years of service.

FAQs

Is My Employer Required to Give Me Severance Pay?

Employees who resign or are laid off are not entitled to severance pay except if a union contract, corporate policy document, or employment contract mandates it. To receive severance compensation, an employee must sign an agreement waiving all rights against the company in return for the employer's approval.

Even if an employee signs a waiver of claims against their employer, the employer must provide severance pay if they have a policy requiring them to do so at a fixed sum. Terminating an employee's employment without providing at least 72 hours notice of their intention to leave is unlawful. Therefore, the employer must pay pre-determined severance pay in full in less than 72 hours of the employee's last day of work, regardless of whether they have given prior notice.

Can I Still File for Unemployment if My Employer Gave Me Severance Pay?

First, the Employment Development Department (EDD) checks to see if you've lost pay due to circumstances outside your control. However, severance pay is not considered a continuation of "wages" in unemployment insurance. Therefore, you are still eligible to receive unemployment benefits even if you receive them.

Unemployment benefits will not include severance pay in any situation where:

  • The payment was based on corporate policy.
  • Payment supplements unemployment benefits.
  • Employees in at least one category are eligible for the program.
  • The policy or plan stipulates that the payment goes for a specific purpose.

Can You Negotiate a Severance Package?

Many employees don't consider severance until they get speculations or mass layoffs. Employees can negotiate severance pay at any moment throughout their employment if they choose to. You should start planning for a severance package as soon as you learn about impending layoffs or terminations.

Signing a contract usually takes place within 21 days. Take your time and read through all the clauses. It will help you understand what is typical in your sector and at that specific company.

Negotiable components of a severance package include the following:

  • How much severance compensation you'll get.
  • How severance is compensated (lump sum or installments)
  • A healthcare plan's premiums add up.
  • Confirmed date of termination.
  • Stock options or retirement plans vesting.
  • Employment placement or training services.

How Much Time Do I Have to Consider a Severance Agreement?

An employee has no deadline to accept or reject a claim release offer. You may request additional time. However, the employer is not obliged to grant it. The only exemption is for ADEA claims, which gives former employees 40 and over 21 days to consider waiving claims.

Is My Employer Required to Give Me Severance Pay?

Employees who leave or are terminated without cause are not entitled to any form of severance pay. That's unless a corporate policy manual, union contract, or employment contract is obliged. In addition, an employee must sign an agreement waiving all rights against the company in return for the employer's approval to receive severance pay.

If the employer's policy mandates a pre-determined amount of severance package, they must pay it whether the employee signs a release of claims. You must be given your pre-determined severance payment within 72 hours of your final day of employment.

Lastly, if there are still some uncertainties left, we recommend seeking advice from other top formation services and registered agent services out there. Here are some of the most trusted:

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Swyft Filings

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SunDoc Filings

When compared to other formation services, SunDoc Filings provides volume discounts for multiple states and entities and equally amazing customer support. However, if you want a service that will save you money, you may find other services in the market that cost less. Also, you may not choose SunDoc Filings if you are looking for a service with payment packages with tons of features and free registered agent service.

Inc Authority

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My Corporation

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