If you are a small business owner who needs to fire someone, you may be wondering if you need to provide severance pay, and thus, have a severance agreement. The short answer is no. However, paying severance is a good way to ensure an employee feels taken care of and is not motivated to “come back” and haunt your business, be it with threatening letters from lawyers (regardless if they have a basis or not) or by bashing your company all over social media.
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If you decide to provide severance pay, it should always be conditional upon the employee signing a severance agreement, which is what this article is about.
Here’s what we’ll cover:
- Free Severance Agreement Template
- General Severance Pay Guidelines
- What Needs to be Included in an Severance Agreement?
Free Severance Agreement Template
Below is a severance agreement template that you can customize for your small business and for the specific termination situation you are facing. This template and the content in this article provide general information only, so we would also advise you to consult your attorney about your specific situation. You may also access this template here as a Google Doc, here as a Word Document, or here as a PDF.
Re: Terms of Separation
This letter confirms the agreement (“Agreement”) between you and ABC Company (the “Company”) concerning the terms of your separation and offers you the separation compensation we discussed in exchange for a general release of claims and covenant not to sue.
- Separation Date: SPECIFIC DATE, is your last day of work with the Company (the “Separation Date”).
- Separation Compensation: In exchange for your agreement to the general release and waiver of claims and covenant not to sue set forth below and your other promises herein, the Company agrees to provide you with the following:
- Severance: The Company agrees to pay you, a total of $XXX, less applicable state and federal payroll deductions, which equals XXX weeks of pay at 40 hours per week as severance in the payroll following the Separation Date.
- By signing below, you acknowledge that you are receiving the separation compensation outlined in this paragraph in consideration for waiving your rights to claims referred to in this Agreement and that you would not otherwise be entitled to the separation compensation.
- Return of Company Property:
You hereby warrant to the Company that you will have returned to the Company all property or data of the Company of any type whatsoever that has been in your possession or control by SEPARATION DATE (or deadline).
This includes but is not limited to:
- Laptop and related equipment
- Laptop charger
- Cell Phone
- Company-provided attire/ clothing
- General Release and Waiver of Claims:
The payments and promises set forth in this Agreement are in full satisfaction of all accrued hourly wages, termination benefits, or other compensation to which you may be entitled by virtue of your work with the Company or your separation from the Company.
To the fullest extent permitted by law, you hereby release and waive any other claims you may have against the Company and its owners, agents, officers, shareholders, employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns (collectively “Releasees”), whether known or not known, including, without limitation, claims under any employment laws, including, but not limited to, claims of unlawful discharge, breach of contract, breach of the covenant of good faith and fair dealing, fraud, violation of public policy, defamation, physical injury, emotional distress, claims for additional compensation or benefits arising out of your employment or your separation of employment, claims under Title VII of the 1964 Civil Rights Act, and any other laws and/or regulations relating to employment or employment discrimination, including, without limitation, claims based on age or under the Age Discrimination in Employment Act or Older Workers Benefit Protection Act, and/or claims based on disability or under the Americans with Disabilities Act.
You agree that you will not disparage Releasees or their products, services, agents, representatives, directors, officers, shareholders, attorneys, employees, vendors, affiliates, successors or assigns, or any person acting by, through, under or in concert with any of them, with any written or oral statement. Nothing in this paragraph shall prohibit you from providing truthful information in response to a subpoena or other legal process.
Except for any claim for injunctive relief arising out of a breach of a party’s obligations to protect the other’s proprietary information, the parties agree to arbitrate, in INSERT LOCATION OF COMPANY, any and all disputes or claims arising out of or related to the validity, enforceability, interpretation, performance or breach of this Agreement, whether sounding in tort, contract, statutory violation or otherwise, or involving the construction or application or any of the terms, provisions, or conditions of this Agreement.
Any arbitration may be initiated by a written demand to the other party. The arbitrator’s decision shall be final, binding, and conclusive. The parties further agree that this Agreement is intended to be strictly construed to provide for arbitration as the sole and exclusive means for resolution of all disputes hereunder to the fullest extent permitted by law. The parties expressly waive any entitlement to have such controversies decided by a court or a jury.
- Attorneys’ Fees:
If any action is brought to enforce the terms of this Agreement, the prevailing party will be entitled to recover its reasonable attorneys’ fees, costs, and expenses from the other party, in addition to any other relief to which the prevailing party may be entitled.
The contents, terms, and conditions of this Agreement must be kept confidential by you and may not be disclosed except to your immediate family, accountant, or attorneys or pursuant to subpoena or court order. You agree that if you are asked for information concerning this Agreement, you will state only that you and the Company reached an amicable resolution of any disputes concerning your separation from the Company. Any breach of this confidentiality provision shall be deemed a material breach of this Agreement.
- No Admission of Liability:
This Agreement is not and shall not be construed or contended by you to be an admission or evidence of any wrongdoing or liability on the part of Releasees, their representatives, heirs, executors, attorneys, agents, partners, officers, shareholders, directors, employees, subsidiaries, affiliates, divisions, successors or assigns.
- Complete and Voluntary Agreement:
This Agreement constitutes the entire agreement between you and Releasees with respect to the subject matter hereof and supersedes all prior negotiations and agreements, whether written or oral, relating to such subject matter. You acknowledge that neither Releasees nor their agents or attorneys have made any promise, representation or warranty whatsoever, either express or implied, written or oral, which is not contained in this Agreement for the purpose of inducing you to execute the Agreement, and you acknowledge that you have executed this Agreement in reliance only upon such promises, representations and warranties as are contained herein, and that you are executing this Agreement voluntarily, free of any duress or coercion.
The provisions of this Agreement are severable, and if any part of it is found to be invalid or unenforceable, the other parts shall remain fully valid and enforceable. Specifically, should a court, arbitrator, or government agency conclude that a particular claim may not be released as a matter of law, it is the intention of the parties that the general release, the waiver of unknown claims, and the covenant not to sue above shall otherwise remain effective to release any and all other claims.
- Modification; Counterparts; Facsimile/PDF Signatures:
It is expressly agreed that this Agreement may not be altered, amended, modified, or otherwise changed in any respect except by another written agreement that specifically refers to this Agreement, executed by authorized representatives of each of the parties to this Agreement. This Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Execution of a facsimile or PDF copy shall have the same force and effect as execution of an original, and a copy of a signature will be equally admissible in any legal proceeding as if an original.
- Governing Law:
This Agreement shall be governed by and construed in accordance with the laws of the State of INSERT STATE.
- We advise you to consult an attorney prior to signing this agreement.
- Effective Date:
This Agreement is effective on the date it is signed by both parties.
If the employee is age 39 or younger:
This offer of separation compensation in exchange for a release of claims will expire at 5:00 p.m. on INSERT DATE (usually 7-10 days from termination date).
If the employee is age 40 or older:
This offer of separation compensation in exchange for a release of claims will expire at 5:00 p.m. on INSERT DATE (must be 21 days from termination date). You then have 7 days after signing to rescind your signature and make this agreement null & void. Thus, the Effective Date will be up to 28 days from today.
If you agree to abide by the terms outlined in this letter, please sign this letter below and also sign the attached copy and return it to me. I wish you the best in your future endeavors.
INSERT NAME, POSITION, AND COMPANY (Print)
READ, UNDERSTOOD, AND AGREED
_________________________________________ Date: __________________
When Should You Offer Severance Pay?
Although you’re not obligated to provide severance pay (unless you agreed to pay it an employment contract) to a terminated employee, it is generally given in the following cases:
- Someone is fired due to business constraints or other reason not related to performance
- Someone is laid off
- Someone is fired for performance or behavior, but the employer doesn’t have documentation
- Someone is fired for reasons that are up for interpretation like a conflict with another employee.
Usually, severance pay wouldn’t be provided for someone who is terminated for a serious issue, like stealing or doing drugs on site, or for someone who has had repeated performance issues.
Here are general rules of thumb when considering severance pay:
What Industry Are You In?
If the employee in question is a salaried worker, like a General Manager of a restaurant, severance pay is more common. This is because there might not be any documentation of performance or behavior issues, or the termination is due to non-performance issues (e.g. the employee doesn’t agree with the direction of the business).
If you are a business with primarily shift workers, hourly employees, or part timers, you generally do not need to pay severance. This is because terminations in these businesses are usually for clear cause like performance or behavior.
Has the Employee in Question Been with you Longer Than 5 Years?
If the employee in question has been with your business a long time, a classy option, even if the employee is hourly, would be to give the person severance pay to help them transition.
Do You Have an Employment Contract with The Employee?
If employer commits to providing, say, 4 weeks severance pay in an employment contract, then you need to legally abide by that. If you signed an employment contract that provides for severance pay, there are other rules that you’ll also need to comply with. For example, you cannot make severance pay conditional upon a release of claims if you’ve signed an employment contract providing for severance pay.
Are You Worried They Will Try To Sue You?
We are being very blunt here, but if you are worried an employee will take legal action, even if they don’t have a justification for doing so, we advise you to consult your attorney about the appropriate severance amount (and if termination is even the right solution).
How Much Severance Pay Should I Give?
Severance policies in general usually are to the tune of:
- 2-4 weeks’ of pay for every year of service; or
- 10-15% of total salary for every year of service
Below I’m including some examples of severance pay I’ve seen when working either in-house as an HR manager or as an HR consultant.
Severance Pay Examples Table
|Type of Company||Situation & Employee Type||Amount of Severance|
|Startup Software Company||Performance and communications issues with a salaried Permit Manager||2 weeks pay|
|Startup Monthly Product Company||Performance issues and took vacations without asking; founding company member||4 weeks pay and common stock shares|
|Established Marketing Firm||Long time employee’s role had become obsolete||1 month of pay for each year of service (totaled 1 full year of severance pay)|
|VP Marketing at Lead Generation Company||Performance issues and lack of dedication to the role||2 months of pay and benefits for 2 more months|
|Small IT Support Firm||Performance issues and lack of dedication to the role||8 weeks paid exit plan plus 2 weeks severance pay|
Some things you’ll want to think about when determining the amount of severance pay:
- How long the employee has been with your company
- Whether the employee is being fired for cause or performance or for something else
- The competitiveness of the industry and role and how long it might take the employee to find substitute employment
What Needs to be Included in a Severance Agreement?
Aside from the legal jargon that you can see dominates our severance agreement, you will want to make sure that you have some key components in your severance agreement, and we list them below.
Use official company letterhead & the employee’s full legal name
This is a legal document and should reflect as such by being put on formal letterhead and having formal names, addresses, and the full company name.
Provide the details of severance pay
You will want to make sure that the amount of severance pay and how you calculated it is clear in the severance agreement. If you have a company policy on severance pay that is in your employee handbook, you might also want to include that policy here if your severance reflects that policy (as well as the date the employee signed the handbook).
Release of legal claims
As long as you do not have an employment contract with your employee, then you can include a release of claims or a covenant not to sue in your termination agreement. This means that by signing the agreement and in exchange for the severance pay, the employee agrees not to sue you or make legal claims against you in connection with his employment or termination. For example, you could prohibit claims of unlawful termination or employment discrimination.
Even if there is no reason to think the employee will sue you, this release of claims is standard in severance agreements.
Return of company property
You will also want to include a return of property section where you list out what the employee has that belongs to the company and by when and how it should be returned. For example, many people ask if the company will pay for the shipping of company items back to the office. If you are not prepared to pay for that or if you want them returned a different way, you will want to include that in this section.
Provide a deadline to sign the severance agreement
You want to make sure the employee knows when they have until to sign the agreement and, if they are age 40 or over, that will be 21 days from date of termination (and they also get 7 more days to change their mind after signing).
If the employee is 39 or younger, usually 5-10 days is plenty for someone to consider the severance agreement and sign.
This age distinction is because of the Age Discrimination in Employment Act (ADEA) that protects employees who are age 40 or older, and provides especially specific parameters to protect them around terminations. You can read more here.
The Bottom Line
A severance agreement is absolutely necessary if you are going to provide a terminated employee severance pay. The agreement serves to protect you and your business from legal issues with a soon-to-be former employee. We also advise you to consult your attorney on all matters regarding severance pay and termination of an employee to be thorough.
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