When an employee separates from their job, they may be asked to sign a severance agreement. A severance agreement is a contract between an employer and employee that outlines the employee’s separation from the company.
It may be offered to employees who are laid off, terminated without cause or under some circumstances, employees who voluntarily resign. There are several topics that should be included in the agreement.
Severance agreement elements
The severance agreement should state the reason for the employee’s termination, even in situations where the separation was beyond the employee’s control, like a layoff or downsizing. It should also include the amount of severance pay the employee will receive and how often it will be paid. Payment may be in the form of money or in benefits.
An employer may offer a severance agreement so that the employee will resign voluntarily. This may occur where the employer and employee agree that it is best for both parties if the employee leaves.
Usually, the agreement also includes a confidentiality clause, which prohibits the employee from disclosing confidential information about the company and a noncompete clause, which prevents the employee from working for a competing company for a certain time period.
The agreement may also include a release of claims. This means that the employee states that they will not sue the company for the termination. This is included to help the company mitigate risk.
The company may choose to sign a severance agreement to maintain goodwill with the employee and to help provide them with financial resources while they pursue their next role.