Severance Agreement

Free Severance Agreement Template

Companies that are restructuring or reducing their workforce may let go of employees to better fit into their new business model. Employees laid off for reasons other than misconduct find severance agreements helpful, as they come with a termination payment that can prove lifesaving during that unstable time. These agreements also benefit employers by releasing themselves of liabilities surrounding the termination.

Because of its many benefits, writing a well-structured and comprehensive severance agreement that will protect your company and dignify terminated employees is crucial. An attorney can provide insights into the contract’s governing laws.

Both parties must read the contract carefully to ensure they are not forgoing much more than they gain from the agreement. For instance, an overly restrictive non-compete clause may put off a newly laid-off employee who is anxious to find their next source of income. Preparing well enables employers to craft a document that will appeal to the employee and protect the company’s interests. Let’s discuss how to prepare before drafting a severance contract.

Components of a Well-Structured Severance Agreement

Your severance agreement’s structure may look unique based on the items and clauses you choose to include. However, there are components that each document must have to make it legally binding. Below is a list of the contents of a comprehensive severance contract.

Names

Write the names of both parties—the employee and employer entering into the agreement. The general structure may be similar if you are terminating several employees, but you must tailor every document to the specifics of each individual.

Dates

Enter the date you reached the agreement. Other dates you must include are when the severance takes effect and when every party signs the contract.

Severance payment amount

A significant aspect of the agreement is how much you offer to pay the employee as you part ways. It may be required by the employment contract (for example, when there is no notice of dismissal). Or you may have a company policy to cushion laid-off employees as they seek work elsewhere. Specify how much you will pay and if it will be made as a lump sum payment or in installments.

Benefits extension

The contract should specify if and for how long the employee continues to enjoy the benefits that came with their position. Such benefits include insurance coverage, healthcare, retirement benefits, and the ability to hold company stock. Some employers allow former employees to continue using company-provided healthcare insurance as they seek alternatives. They may require that the employee pay the premiums for that period.

Confidentiality

Employees may know your trade secrets. Including a confidentiality clause ensures they cannot share that information with another entity for a specified amount of time.

Non-disparagement

This clause prohibits employers and employees from spreading negative information about each other. They cannot disparage the other party in private or public. Keep in mind that this or any other non-disclosure clause cannot stop anyone from speaking about and reporting instances of sexual harassment and assault.

Non-solicitation clause

Include this clause to prevent disgruntled employees from enticing or persuading others to leave the company. This clause protects you by ensuring you have a stable and reliable workforce.

Non-compete clause

You may require that dismissed employees cannot join a rival entity for a specified duration. Some jurisdictions don’t recognize non-competes. But where it applies, it can be useful in ensuring you stay competitive among your peers.

Liability Release

Severance agreements allow employers to protect themselves against lawsuits and other claims related to termination. Employees agree to forfeit any further claims in exchange for the severance amount and benefits they receive.

Dealing with Company Property

Address the need to return items such as company laptops and phones. Specify how soon they must do so and the consequences of not keeping time.

Governing Laws

Mention the laws you will use to enforce the contract. State laws differ, so it’s best to consult an attorney in your area.

“Not Admission of Liability” Clause

Include this clause to reiterate that entering into this agreement with a laid-off employee does not amount to admitting liability or acknowledging wrongdoing.

Signatures

The company representative and the employee should sign the document, print their names, and write the date they did so.

When the document is completed and signed, it becomes legally binding. Therefore, it is paramount that you keep your end of the bargain to avoid legal battles.