Your organization has just decided to have a reduction event. As a human resources executive, you now have to figure out how to exit your laid off employees out of the organization. This entails a lot of activities, but one of the most important (and the most time consuming) is figuring out how to write a severance agreement.
Severance agreements are contracts between an employer and employee documenting the rights and responsibilities of both parties in the event of job termination.
Severance agreements are generally customized to each organization and each particular situation. Because of this, there is no standard for what to include when writing a severance agreement.
Below are common sections that are included in a severance agreement:
- Confidentiality Clause
- Non Compete Clause
- Non Solicitation Clause
- Non Disparagement Clause
- Return of Property
- Career Transition Benefits
- Severance Pay
- Rehire Policy
- Continuation of Benefits
- Release of all Claims
These are just a few of the areas that you could potentially cover in your severance agreement. Each of these sections has specific details that are important for human resources professional to understand to fully know how to write a severance agreement.
But before we get into each specific area, make sure to download our severance resources with the buttons below:
Also, Careerminds is not a law firm, and this blog is in no way legal advice. Before you administer any severance agreements that you write, make sure to consult with your corporate counsel or an attorney.
Now let’s dig into these sections of a severance agreement…
How To Write A Severance Agreement: Consideration
Consideration is a funny word for anyone outside of the legal profession. According to Ottinger Law Firm, here is what it means:
“Consideration is the legal term for an exchange of value. A contract is not enforceable unless there is a tangible exchange of value. In a severance agreement, the exchange of value is usually an extra payment to the departing executive in exchange for a waiver of the executive’s right to sue the employer. It is important that you understand this part of the severance agreement. You should not sign a severance agreement unless you understand exactly what you are getting and what you are giving up.”
Basically, for any contract to be valid, there has to be value to all parties involved. Specific to severance agreements, this is why organizations offer severance pay in exchange for the loss of employment. The business receives value (they no longer have to employ said person) and the laid off employee receives value (the extra payment from the business).
Because of this, you will want a signed statement in your severance agreement that addresses that both parties in the contract are satisfied with the met consideration.
How To Write A Severance Agreement: Confidentiality Clause
Most organizations will want a confidentiality clause in their severance agreement to protect themselves in future negotiations.
This confidentiality clause will essentially require that your employee not discuss the terms of their separation with anyone. “Terms” mean any benefits, pay, or special circumstances given to an employee in the agreement.
Why would you want to keep this confidential?
Well, many employees will choose to negotiate their severance agreements. If you have no confidentiality clause, it will provide employees with bargaining tools to increase their own severance pay or request more benefits.
Also, leaking this type of data to the public can hurt your public image. If your organization offers severance that is below industry standard, this could make headline news (depending on your location and business size), which could inturn actually affect the primary functions of your business.
There is also a chance that information could be leaked in a Glassdoor review, which could then dissuade any future talent from becoming an employee at your organization.
How To Write A Severance Agreement: Non- Compete Clause
A non-compete clause (also called a non-compete agreement) is “contract between an employee and an employer, where the employee agrees not to enter into competition with the employer after the employee terminates or is terminated," according to The Balance.
In more simplified terms, it is an agreement between the worker and the organization that whenever that person’s employment ends with the organization, they will not go to work for that organization’s competition.
For example, let’s say that you are an employee at Google. Your company requires that you sign a non-compete agreement. This means that whenever your employment ends with Google, you can’t start a new position at a competitor, such as Yahoo!.
This clause needs to provide details in regards to:
- The length of time this clause if effective
- Who is considered a competitor (location, industry, etc)
How To Write A Severance Agreement: Non Solicitation Clause
A non-solicitation clause is very similar to a non-compete. Essentially it protects your organization from any laid off employees who try to poach your current business.
For example, let’s say that you are a staffing firm. If you let go of your COO, and then required her to sign a non-solicitation clause, it would protect you from losing any clients to her if she decided to start her own business.
While this might not seem necessary, don’t underestimate the relationships and intelligence your employees have gained during their tenure at your organization. Regardless of their level within the organization! If said person is successful in poaching your revenue stream, it could deeply impact your overall organization.
How To Write A Severance Agreement: Non Disparagement Clause
A non-disparagement clause prohibits your laid off employees from saying anything about your organization that could potentially harm it.
Similar to a confidentiality agreement, it requires silence about your organization, but in a much broader sense than just information pertaining to the severance agreement.
Several organizations take this a step further by not only requiring that nothing be said negatively about your organization that could harm it, but also that no actions be taken against it that could harm it as well.
For example, if Mark was laid off from Jayhawk Manufacturing and signed a non-disparagement agreement, he wouldn’t be allowed to do the following actions:
- Speak in a way that would harm the organization to any of his peers
- Speak about the organization in a way that would harm it in the press
- Take actions against the organization that could harm it, etc
You might be wondering what actions could harm an organization? Well, in today’s modern world, sending an anonymous email to an investor or posting an insider review of an organization online could severely harm an organization.
How To Write A Severance Agreement: Return Of Property
Many organizations include a section in their agreement that outlines how to return company property to the organization.
Several employees are usually given a company laptop or cellphone. But specialized employees may have much more detailed or expensive equipment that is owned by their organization.
For example, think about a storm chaser who has weather tracking equipment and an expensive vehicle built to withstand extreme weather. Losing this property would be detrimental to the value and ongoing success of an organization.
In this section of the agreement, make sure to include any information about how to return property, including times and locations. Also make sure that the consequences for not returning equipment are communicated clearly, such as a loss of severance pay or even legal action.
How To Write A Severance Agreement: Career Transition Benefits
Most organization offer their laid off employees some sort of career transition assistance after they have been laid off. This assistance, generally called outplacement, can help your employees find a new position more quickly than if they went at the job search alone.
Many organizations offer outplacement because it can help reduce the risk of a lawsuit after a layoff, as well as protect their employe brand by soothing any disgruntled employees.
At Careerminds, we work with your laid off employees until they find their next role, and we do it at 30-70% less cost than other traditional outplacement firms. Here are some of our features:
- Until Placement
- One-on-One Career Coaching
- Virtual and In Person Capabilities
- 16.5% better online employer brand
- And much much more!
You can download our pricing information with the button below.
How To Write A Severance Agreement: Severance Pay
How much severance pay should I give my employees? How many weeks of severance pay should I offer? Severance pay is one of the most important aspects of a severance agreement.
There are three areas you should consider when thinking about severance pay:
- Payment based on years of service
- Vacation time
Most organization calculate the bulk of severance pay from an employees tenure at an organization. The longer an employee has been at an organization, the more severance pay they will receive.
Your organization will determine how many weeks of pay an employee will receive. Organizations with an emphasis on employer value proposition will likely have larger severance payout than others.
Here is an example payout table:
Calculating Severance Pay Based on Tenure
Length of Service
Any vacation time that your employee has accumulated, according to your internal policy, will also need to be paid out in the severance pay.
Finally, if any of your employees work on commission, you will have to consider how to structure their payout amounts.
Typically, the easiest way to calculate severance pay for commission-based workers is to get an average pay rate during their tenure at your organization and then pay them based on that average using a chart similar to the ones above. This allows you to fairly balance how much pay they get with the added benefit of it being easy to explain in the severance agreement.
Calculating Severance Pay Based On Tenure #2
Length of Service
How To Write A Severance Agreement: Rehire Policy
Many of your employees will start looking for new positions in the job market and will want to inquire about any openings at your organization.
For this reason, it is a best practice to include a rehire policy in your severance agreement. The policy may change depending on the situation in which the person is let go.
If someone is a poor cultural fit, your rehire policy might be much more stringent than someone who has been laid off due to a position elimination.
Many organizations also provide details in this section about when an employee can apply for another position at the organization, as well as if they are rehired how it will impact their benefits and recognition of tenure at the organization.
How To Write A Severance Agreement: Continuation of Benefits
It is also a best practice to include any information about the continuation of your employee’s benefits after they are no longer employed at your organization.
Most people think of COBRA when creating this section. As they should be, because that should definitely be included in this section. But it also pertains to other benefits, such as tuition assistance for college courses that your employee could be enrolled in per your permission.
Create a list of all of the benefits that your employee will continue to receive after their last day, and include detailed instructions in regards to how they will continue to receive said benefits.
How To Write A Severance Agreement: Release of all Claims
Finally it is a common practice for your organization to have laid off employees sign a release of claims. A release of claims allows an organization to be released from all claims in exchange for severance pay and benefits.
According to The Balance:
“The release of claims is an agreement between an employer and an employee whose employment has been terminated. The release of claims legal document generally lays out the prior terms of employment and an agreement to negate them. Any other agreements released are also included in the document. The release of claims is offered in return for the acceptance of a severance package. The intent of the document is to limit potential litigation for reasons such as discrimination.”
It should be noted that a release of claims will be different for employees over the age of 40 due to their protection under the law. Make sure that you have your corporate counsel or law firm draft different release of claims based on this.