Severance Agreements

Other than the specific benefits that are required by federal and state law, employers are not required to offer severance payments or benefits to employees they fire. Employers may choose to offer severance benefits, such as lump-sum payments or outplacement services, to fired employees depending on the circumstances of the firing or to keep up morale and loyalty and the appearance of being a fair employer. Another good reason to offer some kind of severance is that whenever you fire or lay off a worker, there’s the possibility that the person will take legal action against you. To avoid this threat, you may have a strong incentive to offer a severance package if an employee is leaving under circumstances that raise a risk of future litigation.

Example

You may have concerns about a potential wrongful discharge suit if you fire an employee who has previously complained about being sexually harassed by other employees or being treated unfairly. You can use the offer of a severance package to negotiate a release from the employee of his or her right to sue you for employment-related claims. Be aware, however, that offering severance packages as a means of "buying out" employees isn't without its own risk. The offer could backfire if it alerts an employee to possible claims that the employee didn't realize existed.

To make the contract valid, you must give the employee something of value in exchange for the promise not to sue. Courts like to see some money changing hands, so you might consider offering a lump-sum payment of at least two weeks’ pay. However, you can also offer terms like an agreement not to contest payment of unemployment benefits, or an agreement to provide a satisfactory job reference if requested by any prospective employers. These cost little or nothing, but can be valuable to the worker.

If you provide severance benefits on a case-by-case basis, you're also free to negotiate what benefits, if any, you'll provide to each employee. These can include temporary health coverage and assistance in finding new employment.