A severance agreement is a legal contract that specifies the terms of an employee’s termination. While these agreements are not required, they can benefit both parties when crafted thoughtfully.
There are a few important components to include when you draft a severance agreement for your business.
Pay and benefits
The contract should outline the pay and benefits the employee will receive after their departure. This usually includes a lump sum payment equivalent to a certain number of weeks or months of salary. The agreement should specify the exact dollar amount and when you will make the payment. Continued health insurance is often provided for a specified period as well.
A confidentiality clause is essential in a severance agreement. This prohibits the employee from sharing proprietary company information. Specify any confidential materials the employee must return. The agreement should prevent disparagement from either party.
Release of claims
The severance agreement should state that accepting the severance package releases the company from legal claims. Make it clear that no further compensation is available once you issue the severance payment. This protects the business from lawsuits.
Timeline and terms
Outline when each severance provision will occur and list any additional terms. For example, specify how you will make the payments, when extended benefits terminate and when any confidentiality and non-disparagement provisions apply. Detail any non-compete period if applicable.
According to recent studies, 64% of companies now offer severance to all of the company’s employees. Understanding the value of severance and creating detailed severance agreements can protect your company’s reputation and relationship with departing employees.