Severance agreements are a vital part of an employer’s HR strategy. These agreements, typically provided when an employee exits the company, offer financial compensation and other benefits in exchange for certain legal protections. A well-drafted severance agreement can mitigate potential legal risks, protect both parties and foster goodwill. Here’s a guide on how to legally structure severance agreements and what employers should include to ensure they are both fair and legally compliant.
Severance Pay and Benefits
One of the most crucial components of a severance agreement is severance pay. This is typically calculated based on factors like length of service, position, and the company’s policies. Employers must ensure that the severance pay aligns with company policy and any contractual obligations. Additionally, the agreement should specify continued benefits, such as healthcare, which might be offered for a limited period post-termination.
Release of Claims
A key purpose of a severance agreement is to protect the employer from future legal claims. A release of claims clause should clearly state that the employee waives any future legal action against the employer. This can include claims related to discrimination, wrongful termination, or breach of contract. However, the release should be carefully worded to ensure that it does not violate any state or federal laws, such as age discrimination under the Age Discrimination in Employment Act (ADEA).
Non-Compete and Non-Disclosure Clauses
Including non-compete and non-disclosure clauses in the severance agreement can help protect the company’s proprietary information and intellectual property. These clauses should specify that the employee cannot join a competitor or disclose confidential company information for a certain period after leaving. It’s important that these clauses are reasonable in terms of duration, geographic scope, and enforceability under state law.
Return of Company Property
Employers should specify that the departing employee is required to return all company property, including laptops, phones, documents, and keys. This clause ensures that there is no confusion about property ownership post-termination and protects the employer’s assets.
Confidentiality and Non-Disparagement Clauses
To maintain a positive brand image and protect the company’s reputation, a confidentiality clause should prohibit the employee from discussing the terms of the severance agreement or sharing confidential company information. Additionally, a non-disparagement clause prevents the employee from making negative public statements about the company.
Final Pay and Tax Considerations
Employers should specify when the final paycheck will be issued and clarify any deductions that will apply, including taxes. Employees must also be informed of the tax implications of their severance package. It’s essential that this section complies with local wage and hour laws.
Conclusion
Structuring a severance agreement requires careful consideration of both legal and practical factors. Consulting with legal experts when drafting these agreements is crucial to avoid potential pitfalls and ensure the terms are enforceable.
