In the United States, in all states except Montana, employment is generally presumed to be at-will. When employment is at-will, employers are not required to give severance to employees whom they terminate. This is the rule; but of course there are exceptions. For example, if the employee has a contract (typical with high level executives) or is part of a union, then a severance package might be previously agreed upon and mandatory.
Severance agreements are also commonly referred to as golden parachutes or waiver and separation agreements, since the employee is given a certain amount of unearned money, usually in return for signing a release agreement. That release can sometimes be worth the price, even when severance is not mandatory. Consider:
- Will A Severance Agreement Avoid Disruptions Caused by the Departing Employee? Presenting potentially disruptive employees with a severance package upon termination will likely make him or her more amicable during the termination process, reducing stress and potential problems for employer.
- Does the Employee Have a Good Claim Against the Employer for Violations of Employment or Wage Laws? If so, it may be best to settle this at the outset, rather than risk litigation.
- Are You Worried About a Negative Impact on the Business’s Goodwill? An employer may offer an employee a severance agreement so they, or other remaining employees, have a positive association with the business. This will reduce the bad feelings (and disparagement) within the terminated employees and those who are left behind.
- Was the Employee a Long Term and Loyal Employee? Sometimes a severance is just the right thing to do for a long term, loyal employee who is simply no longer needed at the business. It is somewhat common to soften the blow to terminated employees who have worked for an employer for a number of years with a severance agreement. This arrangement will help provide financial support until the employee finds a new job. A broad rule of thumb is to provide one week’s severance pay for every year the employee worked with the company.
After deciding whether you wish to provide severance to an employee, you should contact an attorney to discuss the mandatory provisions. Employee release agreements are frequently struck down as unenforceable by courts when they are not well-drafted by an employment law specialist. Things like non-compete provisions, non-disparagement provisions, or failure to provide mandatory revocation and cooling-off periods, for example, can result in a useless release — or worse, liability for violating certain Labor Laws in your agreements. Further, wages that are admittedly owed cannot be released. Employers should use counsel. It is not a good idea to just grab a sample off the internet.