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When an employer wishes to terminate the services of an employee for any given reason, it is lawful they give the employee at least one month notice. The purpose of the notice is to give the employee time to adjust emotionally and be prepared to quit the job. The outgoing employee is entitled to receive job termination benefits. In such a case, the employer will prepare a severance agreement template that details the job termination date, the amount payable, and the expected payment date.

What is a severance agreement?

An employee severance agreement is a perk provided by business owners when an employee’s job is terminated unwillingly. For such a notification to be legally binding, severance letters allowing for the settlement of claims:

  • As guided by ADEA (Age Discrimination Employment Act)
  • Should conform with certain relevant provisions of the Earlier OWBPA (Workers Benefit Rights Act).
  • ERISA severance package template is enforced often by larger corporations, aside from cases in which the severance contract is enforced by a collective agreement or state statute. Like with most welfare benefits packages and company pension plans, severance plans apart from informal severance arrangements must abide by ERISA.

On an informal level, small employers are more likely to choose to negotiate severance pay. In most cases, the smaller businesses do not include the required two weeks’ pay for job terminations against the employee’s will.

Downloadable Templates:

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What should be included in a severance agreement?

The things to include in the severance package template are largely dependent on the employer. Each employer has different policies and guidelines, but there are the general rules of severance letters.

On the part of the employer, the severance contract should be checked by an attorney to ensure it is legally binding in case the employee goes to challenge the terms to through a court of law.

On the part of the employee, you must never sign the employee severance agreement before you understand fully its content. You can download a severance package example to give you a detailed overview of what you should look out for before appending your signature.

Alternatively, you can seek help from an attorney for advice if the document is legally binding or not. Once you sign the document, it means you are in agreement to every term contained therein and you cannot revoke them unless through an attorney,

The following are the details of the contents of a severance contract.

  • Consideration
    Consideration is the token of pay an employer offers the outgoing employee for signing the severance letter. It is the severance package and must be legally binding for it to be considered worth it.
    The employee severance agreement must not be signed under duress on the condition that whether the employee signs the document or not, the amount contained therein is what the employee will receive. The severance pay must be in agreement with the years of service and the level of authority the employee worked in.
    For example, an employer in his terms of service could have a defined amount of pay any employer receives once their job is terminated to assist them to look for another job. That cannot be considered as a severance package. The package must be outside the defined payment and good enough to ‘help’ the employee signs the severance package template.
    The legal definition for the exchange of value is a consideration. Until a substantive exchange of value occurs, the severance agreement is not binding. The exchange of value in a severance agreement contract is normally an additional payout to the leaving employee in return for a denial of the employee’s right to sue the company. It is necessary to understand this portion of the severance agreement.
  • Time
    The period depends on the amount of time the employee is given to think about the offer and sign. If the employee is below 40 years old, they are given a 21-day period and if above 40, they are given a 7-day period.
    With the help of your attorney, ensure you expressly state every term and condition of the employee severance agreement in a language and style easily understandable by your employee.
    Before handing over the severance package template to your employer to sign, make sure you will be ready with the package within the period stipulated in the severance contract.
  • Your paid time off (PTO)
    Your PTO must be included in the employee surveillance agreement. PTO includes every compensation owed to you by the employer regarding paid leave days, maternity/ or paternity leave, national holidays, and your time off.
    As an employer, you should study the company policies regarding the PTO and understand its implications on the severance package. The employee on the other hand must study the employee guide book to help them understand their rights regarding PTO.
    It should be noted that PTO is paid promptly on the final day of the employee’s duty in the company or within a few days after they depart.
  • Your medical package
    Under COBRA (Consolidated Omnibus Budget Reconciliation Act – 1995), any employee whose job is terminated unwillingly is protected by the law to enjoy their employer’s health benefits for a maximum of eighteen months from the day of their job termination.
    If the employee has a disability, the law entitles them a maximum period of twenty-nine months from the day of termination. As an employee, you can negotiate your COBRA payment by asking your employer to continue paying the insurance up to the period set within the law or they consolidate the amount to accrue within the period and pay you a lump sum cheque upfront.
  • Options to their limited stocks with the company
    Some companies allow their employees to buy stock from the company but give restrictions on when the employee can sell the stocks for a profit. Before signing the employee severance contract, the employee can make some requests concerning their shareholding in the company.
    The employee can request the remaining time before the maturity of time to sell be accelerated. In other words, the time is pulled backward to look like it matured earlier. The employed is paid the accelerated value the same way it would have been at maturity.
    The second option would be a cashless option where the employee avoids out of pocket payment.
    Thirdly, the employee can wait for ninety days within which they can sell their stocks and redeem the cash. This third option is most preferred by employers.
  • Employee bonus
    In most cases, the exiting employee will be paid a performance-based bonus. This bonus is paid to every employee either annually or bi-annually depending on the size of the company and its governing rules.
    If your time of job termination falls within the time of performance based bonuses, you are entitled to it and it must be captured in the employee severance agreement. Some employers may opt to give you a spot bonus for immediate recognition if the performance-based bonus time was far away.
  • General release liability
    General release is written to safeguard the company against any claims that may arise from the employee after they leave the company. Sometimes the terminated employee may genuinely or maliciously sue the employer and gain a solid ground for his case.
    Some of the claims could be a promise the employer had made, a complaint, or any other cause of action the employee might raise against their former employer. To cushion such occurrences, the employee signs the general release of liability contained in the severance agreement.
  • Non- disparaging remarks
    There are moments when the reason for job termination may not be favorable either to the employee or employer. Each party may fear against the other peradventure after they bid each goodbye, then sooner each begins to spread malicious information about the other.
    This kind of fear is addressed in the clause called non-disparaging remarks contained in the employee severance template. It is like each party swears that they will not disclose sensitive information about the other party nor speak defamatory language against the other.
  • Signatures and stamps
    The severance contact is cannot be complete or legally binding without both parties appending their signature on the document. The employee after reading thoroughly reading the severance letter and also seeking help from a lawyer to understand the document must append their signature.
    It should be noted that once the employee signs the severance package template, they will have sealed the document and accepted every term and condition contained therein. If the employee later feels unsatisfied, they can only seek redress from a court of law.
    Likewise, if the employer signs the severance contract, they remain legally bound by the document and must fulfill their obligation to the terminated employee in full. If there is a breach of any magnitude by the employer, the employee has full right to pursue justice in a court of law.
    Once the employer fulfills every part contained in the severance letter, they are set free from the agreement and the employer may not pursue any further claims unless advised otherwise by an attorney.


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