Part of running a business is managing the employee separation process. Managing this process can be just as important as managing employees’ day-to-day responsibilities. When employees leave your organization, it is often advantageous for the exiting employee to sign a severance agreement. An agreement that properly outlines the employer and employee’s expectations will save time, money and considerable headaches in the near and distant future.
A severance agreement is a contract between an employer and employee that documents the rights and responsibilities of both parties at termination of employment and beyond. Typically, a severance agreement gives the employee payment in exchange for a benefit to the employer. That benefit typically is to waive any potential claims against the company but can also include other matters including, confidentiality, non-disparagement and the like.
Per the Texas Payday Law, a Texas employer does not have to pay an employee severance pay (post-employment wages) unless it is promised to them in a written policy, such as in a formalized severance pay plan, for instance.
If your goal is to have departing employees sign severance agreements, it’s important to remember that there’s no requirement that they do so. Composing a severance agreement that is concise and clearly worded, and that asks for a reasonable level of consideration, will increase your chances that it will be signed.
Drafting the Severance Agreement
When drafting severance agreements, the following should be included.
- Taxability of pay-outs – Is the severance pay considered taxable? In addition to taxability, detail how the payment will be received, whether in one lump payment or over a series of payments.
- Release or waiver of claims – A release of claims means that the employee waives all pending claims or causes of action. Keep in mind, however, that there are some claims an employee by law cannot waive.
- Older Workers Benefit Protection Act (OWBPA) – If the employee is over the age of forty years, you will want them to release all age discrimination claims. Keep in mind that there are additional provisions that must be included in a severance agreement if the exiting employee is over the age of 40. Specifically, the exiting employee must be given 21 days to review the agreement and must be given a 7-day period to revoke the agreement if he or she changes his or her mind.
- Recitals – Recitals refer to any extra information you wish to include that might be unique to your company or industry.
- Last Date of Employment – Include the employee’s last date of employment to ensure their last day of pay and medical insurance coverage is clarified and agreed upon.
- COBRA – Outline whether or not the employee will be eligible for continued medical insurance coverage under COBRA (Consolidated Omnibus Reconciliation Act). Also, include who will be financially responsible for the continued coverage.
- Confidentiality – A confidentiality clause simply states that the exiting employee will not disclose information regarding the severance agreement or other company information.
- Return of Company Property – Provide details regarding what property must be immediately returned to the company, such as computers, cell phones, electronics, or company credit cards.
- Acknowledgement Page – Include an acknowledgement page for signatures and dates.
There are many factors to consider and include when drafting a severance agreement for your company. Consulting employment law experts like those at Simon | Paschal PLLC is the best way to ensure your company’s severance agreement is drafted comprehensively and effectively.