Severance pay is a specified amount an employer agrees to pay an employee upon the employee’s termination from the company. While severance agreements, or packages, are common in many employment policies, these agreements are not legally required under the Fair Labor Standards Act (FLSA) or any other federal law. In fact, there is no federal law that requires an employer to offer severance to a terminated employee. Most employers throughout the country offer severance pay to terminated employees, despite no federal law requiring such an agreement.
Severance agreements are intended to benefit the employee and employer. These agreements generally include a compensation package for the employee, including a schedule of continued payments following termination. Likewise, an employer may elect to continue providing health insurance benefits to the employee for a specified amount of time. Severance agreements also shield an employer from liability for any, and all, claims the employee may have arising from employment. Typically, once an employee signs a severance agreement, any claims the employee may have had against the employer are discharged. Because severance agreements have this effect, employees are usually given time to review the document before signing away any claims. Employers, however, are not required to provide employees with an extended period of time to review the package. As a result, some employers may ask for the agreement to be signed within a few days of presenting it.
Almost all severance agreements will restrict future claims against the employer. By signing an agreement, an employee may be effectively waiving all rights to bring claims for wrongful termination or discrimination under Title VII. If the employee was a victim of sexual harassment, or reported harassment on another employee, there may be a claim against the employer. In such a case, the claim would be barred if the employee chooses to sign the severance agreement. Severance agreements also provide other protections to employers. Depending on the industry, an employer may include a non-compete clause in the agreement. A non-compete clause limits an employee’s ability to work in a specified field, for a specified period of time. Moreover, a non-compete clause may contain geographic restrictions to restrict the employee’s future business.
How Severance Is Calculated
Severance agreements are generally tailored to the employee in question. Employers may offer various severance packages based on several factors, including the employee’s length of employment, seniority at the company, and salary. A company policy, or personnel manual, may outline a formula for calculating benefits for purposes of a severance agreement. Generally, packages will provide a lump sum payment. A lump sum payment is a one-time payment consisting of the full amount of severance pay agreed upon by the employer and employee. Another payment option that may be available through a severance packages is a salary continuation. In such a case, an employee’s salary will continue for a specified period of time, along with other employment benefits, such as health insurance. An employee may elect a salary continuation to ensure ongoing payments during his or her employment-seeking process. On the other hand, an employee may prefer a larger, lump sum payment immediately following termination.
Aside from the discharge of potential legal claims, there are several other considerations an employee should be aware of before signing a severance agreement. An employee may wish to outline a procedure for future job references. Even if an employee was terminated, an employer may still agree to serve as a reference for future employment opportunities. In such a case, an employee may wish to ask the employer to attach a reference letter to the agreement to ensure the employee is aware of what the employer says.
Overall, severance agreements are not required under federal or state law. While most employers provide severance to terminated employees, there is no legal mandate to do so. As a result, employers often have strong bargaining power over employees when it comes to severance agreements. Severance agreements, generally, contain two significant provisions. On the one hand, the agreement provides the employee with a continuation of pay and benefits for an agreed upon length of time. On the other hand, the agreement provides the employer protection against any legal claims the employee may have against the company. This can include anything from sex discrimination to retaliation. Once an agreement is signed, an employee’s rights to such claims are discharged. These agreements are generally a byproduct of the employer’s desire for protection against claims and competition. Because of this, it is advised that terminated employees carefully review these agreements and ensure the payment schedule is properly outlined.