To help avoid potential litigation when laying off or otherwise terminating an employee, many businesses choose to offer severance packages or agreements. A severance agreement can be an important aspect of an employment contract as it can help protect the business against any future litigation from the ousted employee.
Essentially a contract between the employer and employee, a severance agreement offers the terminated employee compensation in the form of pay and/or benefits for a specified period after the employee leaves the company. This compensation is offered to keep the employee from holding the employer liable for any further liability with regard to the termination. The type and amount of this compensation can be left up to the employer. However, once the employee signs the agreement, he or she has effectively agreed to take the compensation, accept the termination and release all rights to further legal claims against the employer.
Although employers are not required by federal law to offer a severance package to an out-going employee, many companies choose to offer some sort of compensation to full-time employees, especially if their termination came as a result of corporate restructuring or downsizing. The factors that can affect the compensation package include the length of time the employee worked for the company as well as the circumstances surrounding their termination. Furthermore, the state of the company's finances can also affect the severance package offered.
As with any area of business law, creating and enforcing a severance agreement can be complex and challenging. Any business owner that wants to include a severance agreement as part of an employment package could consult with an attorney experienced in business law and contacts.