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7 typical components of a severance agreement

On Behalf of | Feb 25, 2023 | Employment Contracts |

Certain situations, such as unforeseen layoffs and abrupt company restructuring, force companies to part ways with their employees. While the law does not require an employer to provide severance pay to its leaving employees, it has been a practice in a lot of industries, as it serves as a gesture of goodwill and recognition of service.

What can the agreement include?

There is no fixed composition when creating terms for a severance agreement. It usually depends on the company’s financial capacity and discussions with its employees. However, here are a couple of terms parties usually include in a severance contract:

  1. Reason for separation and timeline. This includes the reason for the termination, the employee’s date of hire, the date of termination and the allowed period to accept or reject the severance agreement.
  2. Severance pay. This may be a percentage of the employee’s salary for a certain amount of time and paid in regular payments or a large lump sum.
  3. Unused leave benefits. This may include paid vacation and sick days before leaving or a payout of the amount employees would have received from taking those benefits while they were still eligible.
  4. Health coverage. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows employees to continue receiving medical benefits for up to 18 months after their termination.
  5. Liability release. This term stipulates that the employee agrees not to pursue any legal claims against the company once they sign the document.
  6. Non-compete clause. Usually, employers include a non-compete clause to ensure the employee will not work for a competing company with their company resources.
  7. Non-Disparagement Clause. This clause provides that the employee cannot circulate adverse information about the company for a certain period.

It is good to note that these terms may still be subject to negotiation.

Finding that sweet spot

A strong severance agreement is one that satisfies both the employer and employees. If done right, it becomes a mutually beneficial agreement for both parties, easing the tension of termination.



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