If you have any employees, you probably want to look into using a Severance Agreement. This contract is a legally binding document that requires outbound employees to waive their right to sue the company, in exchange for a lump-sum payment and other benefits.
Many companies are making good severance agreements standard, as it helps to attract talent when employees know that they have a measure of safety if they might be let go. Protect your business with a Severance Agreement. It’s much easier to create than you might think.
You’ll need to do all of the proper research and homework first, but this template will give you a head-start and a good framework. You should always consult a lawyer though before finalizing any contracts.
A Severance Agreement is a legally binding contract that gives the employee leaving the company and incentive to not bring any legal action against the company. Generally, severance agreements are quite favorable for the employees, because they give employees a little bit of financial breathing room after they have lost their job, and often some additional assistance with getting the next job.
Companies don’t like wrongful termination suits. Even if a judge determines that the suit brought against the company doesn’t have any merit, there was no discrimination or violation of rights, the lawsuit can still drag on for years, and spur waves of additional suits from other ex-employees. These lawsuits have defense costs which are mostly related to how long they take. Even if the overall goal of an ex-employee is to reach a settlement, the costs related can incur extreme expenses on both parties.
A severance agreement can be thought of as a pre-emptive settlement action. For employees that are even run a remote risk of filing suing the company after they have been laid off or fired, the severance agreement can be a much more enticing offer. Your company, if you choose to offer severance agreements as standard practice, will be seen as a fairer company, with more transparency, and will be more likely to attract new talent. Companies are judged from the beginning by the overall quality of life, and the competition is very strong, especially in tech-related businesses. Promoting a high-quality severance agreement can be one of the tools to help your company stand out and attract the best employees in the first place.
When you issue a severance agreement to the ex-employee, you need to decide how much to offer them, and what benefits. Companies are now making it best practice to not only offer a lump-sum to outgoing employees but also offer benefits. Such benefits include headhunter services to help them get re-hired, coaching, training, and other continued benefits. It might be reasonable to offer stop-gap healthcare coverage until they find their next job or even other benefits.
Calculation of the sum to offer isn’t a trivial task. You have to consider how long the employee has been working for the company, their level in the company hierarchy, whether or not they own shares of the company, and how much. They might have conditions like how many shares they can sell and when, and what the discount rate might be for different levels or tranches. If you are working with a senior-level executive, you will likely need to hire a legal team to customize the process, maintaining attractiveness for the employee, and limiting damages to the company.
It’s important to note that there isn’t any that requires a severance agreement to outbound employees. Severance agreements aren’t required per se, but instead, they provide an alternative methodology to serve the interests of the employees and company without getting into the legal system, courts, and drawn-out disputes. By creating a pre-emptive agreement to avoid disputes, both sides win, and much less inefficiency is spent on legal fees and court time.
If the individual is protected by discrimination, will be replaced by someone in a different category, engaged in protected activity, such as family leave, worker’s compensation, sexual harassment, or made any other official requests or complaints, then extra protection against a lawsuit is required (pre-settlement). Keep in mind that no matter what you sign with an employee, you can’t take away their rights that are given by the law of the land. Depending on the state, county, city, municipality, or other legislative jurisdiction your company operates in, employees may have a wide range of permanent rights, that can not be waived by a severance agreement.
Court dismissals can often occur because severance agreements attempt to waive these fundamental rights. You should always have a legal team take a look over your severance agreement. The cash or other considerations will be spent in vain if the whole contract is dismissed, and in addition, your company might be made open to a slew of lawsuits.
In the severance agreement, it is very important that there are promises made from both parties of equal value. If the agreement is made with a small consideration, that might be grounds for dismissal in court. As a company, you need to review the industry best practice and make sure that the Consideration made is significant, and matches the value of the rights to sue which are forfeited by the employee.
In legal contracts, consideration is one of the core components that makes a contract binding. If the contract does not contain adequate consideration in exchange for promises given, then the contract is not likely to be enforceable. This is another reason why often a lump sum is augmented with benefits. By distributing the consideration across multiple terms, it is much less likely that the Employee can claim did not accept or receive material benefits as a result of the agreement.
In our template for the Severance Agreement, we have tried our best to protect each party in the transaction and make things as clear as possible. Special protections for age discrimination have been used. In the first page, it is mentioned in clear language that the right to file a complaint to the Equal Employment Opportunity Commission relating to ADEA, or the Age Discrimination Employment Act of 1967.
In further sections, we give options for employers to provide cancellation terms. For example, in most states and by federal law in the US, if an employee over or under 40 years old, there are special provisions required for the amount of time they have to review the contract after the offer for severance has been made. If the employee is over 40, in general, they must have at least 21 days to accept the offer, then at least 7 days after signing to revoke at their discretion.
These might seem to be very lenient rules, but they maximize the likelihood that the contract is found fair and enforceable in court, and makes it very difficult to throw out or nullify the severance in court. In general, any agreement becomes stronger if it includes provisions to allow for a best-practice wait time. It is not reasonable for someone to hire a lawyer on the spot, but given three weeks, it is reasonable in just about every situation, and it introduces fairness to the process.
When you create a severance agreement, make it short. Our template is clear, to the point, and concise, avoiding jargon and legalese which can actually decrease contracts’ authority in a court setting. If the parties easily understand it and agree, then judges, lawyers, and companies can all benefit from this useful contract. Get started today with our contract, and see how it changes the way you do business.