What Should Be Included in a Severance Package?
- January 27, 2021
- Business Law
What should be included in a severance package depends on the person leaving the company and what the employer wants to accomplish. Severance packages and agreements are good ideas for employers ending a relationship with an employee. They provide some certainty for an employer because the employee will be obligated to do and not do certain things. But how much control an employer can expect in exchange for extra benefits or cash is limited.
No matter why someone is leaving your company, a severance package and agreement can give you some extra assurance (though no guarantee) that the person won’t give you a nasty legal surprise in the months ahead. Lusk Law, LLC, can help you handle severance issues and protect your business.
What Does a Severance Package Usually Include?
Ideally, the severance package and agreement will be customized to the individual and the situation. It may be a lay-off or a termination for cause, of someone lower in the organization or an employee at management’s highest level. One size doesn’t fit all.
What does a severance package usually include? It should include the following:
Severance Pay
A company may need to pay severance under an employment contract, due to the federal Worker Adjustment and Retraining Notification (WARN) Act or company policy. Though you may not be required to offer a severance package, it’s an incentive for departing employees to make agreements benefiting your company.
How is a severance package calculated? It depends on:
- What you’ve offered to others in the past
- What’s customary in your industry
- The person’s position.
If the employee is suing your company, or has threatened to do so in the past, this could resolve current or future legal claims and, by mutual agreement, get the person out of the organization.
How much to pay would be influenced by the value and strength of the current or potential legal claims as well as what the employee is willing to accept. If you fire the person without a severance agreement, you’ll probably face additional retaliation claims.
Medical Benefits
Under the federal Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA), if the employee gets medical benefits from you, that can continue for up to 18 months after termination. The employee would pay the premiums unless you cover them under a severance agreement. If you do, what you pay may be taxable income for the employee. It could be a lump sum with an additional amount paid to cover the taxes.
Liability Releases
In exchange for extra pay and benefits, the employee would agree to a general release and other provisions. This language could be lengthy and all-encompassing. It could cover any legal claim against anyone connected to the employer. It should also include a specific release of illegal discrimination claims, violations of the Family and Medical Leave Act, and claims for wrongful termination. If the agreement is valid, it should bar lawsuits filed by the employee.
There are legal issues a severance agreement can’t prevent. An employee can’t waive their right to file a complaint with a government agency (like the Occupational Safety and Health Administration, the Equal Employment Opportunity Commission, the Securities Exchange Commission, or the National Labor Relations Board). Civil matters can be covered; law enforcement by government agencies cannot. This includes the employee’s cooperation with a government investigation.
Non-Disparagement/Non-Disclosure Clause
Companies often include a paragraph prohibiting the employee from publishing or communicating to any person or entity disparaging remarks, comments, or statements about the company. This might cover statements casting a bad light on the business’s character, honesty, integrity, morality, or competence.
To make the employee more likely to sign, the company can promise not to disparage them either. The parties should also work out a reference for the employee. It can be a written or verbal statement. The employee should also agree not to disclose important information that could harm the company.
Non-Solicitation of Employees and Customers
Include a prohibition against the employee contacting, for a given time, colleagues in the hopes of hiring them. They should also be banned from soliciting customers or clients. The higher up the employee, the more involved in marketing and sales, the greater the knowledge of your intellectual property and trade secrets, the more danger an ex-employee poses to your company.
Non-Compete Clause
This agreement could prevent the employee from working for a competitor or starting a competing business. This clause works hand in hand with non-solicitation and non-disclosure agreements. This prohibition must be reasonably limited in geography and time. Maryland law forbids companies from using a non-compete clause with workers earning less than $15 an hour or $31,200 a year.
Dispute Resolution
Spell out how future disputes about the agreement or package would be resolved. Instead of going to court, the parties could agree to enter mediation. If that fails, the issue could go to arbitration. The parties should decide how these services’ costs would be paid and by whom (they’re often shared).
Confidentiality
You probably don’t want former employees sharing notes on their severance packages and agreements, especially if one is more generous than others. Include a clause making these documents confidential. Limit release to limited circumstances and specific people (like family members, accountants, lawyers, government agencies, and parties involved in legal proceedings).
Plain Language
Part of the package and agreement should be plain language. The point of offering a severance package is to benefit from it. You’ll get that benefit only if the person accepts it. The more complex, the more “legalese,” the longer the agreement, the greater the chance the person will reject it. If it’s accepted, it will probably take more time since there’s more to go over.
Give the person time to look it over (21 days to consider it and 7 days to revoke it after it’s signed, per federal law if the person is 40 or older) and have an attorney review it. That doesn’t mean you should load it up with everything you could possibly ask for, in dense language meant to give you maximum protection.
There must be trust between the parties before a contract will be signed. It’s a bad idea to make the severance package and agreement appear to be shady because it’s so difficult to understand and is one-sided.
How Is a Severance Package Calculated?
To Get the Most Benefit for the Employer While Being Acceptable to the Employee
The attorneys at Lusk Law, LLC routinely counsel businesses about severance packages. We can draft these documents and negotiate an agreement with the employee or their lawyer.
A properly worded severance package and agreement benefits both parties. Both sides need to understand their roles and responsibilities, reducing the chances of a future misunderstanding and contract disputes.
Contact Lusk Law, LLC through our online form, or call us at (443) 535-9715, so we can discuss how we can help you resolve your employment issues.