What Small Businesses Need to Know About Severance Agreements

Small business owners should be aware of the pros and cons of offering a severance agreement. In most cases small businesses will probably not offer this type of benefit, as law does not require companies to offer this benefit to employees. However, if your company wants to offer its employees this benefit you will need to understand how severance agreements work, and what they make you liable for.

The Parts of a Severance Agreement

A severance agreement is generally used for dismissals of executive level employees, and in some cases they are used as a gesture of good will when lay-offs or restructuring causes the termination of valued employees. Employers that offer a severance agreement will need to provide a written description of what severance benefits the company offers, who is eligible for these benefits, and how the compensation is calculated. For example many companies base their severance on the number of years that an employee has worked for the company. If the executive leaving has worked for the company for 20 years and the company’s severance compensation is one week of pay for each year of service, then this executive would receive a severance pay-out worth 20 weeks of pay.

If the severance agreement is executed as a way to prevent a lawsuit, either because of possible discrimination actions or because the employee terminated has grievances with the company, then the severance agreement will need to outline the terms of accepting the agreement. The terms will need to outline what benefits will be offered to the employee in exchange for a release of their right to sue the company for any reason relating to their termination or employment. These terms should also provide the terminated employee with a time period between 20 days and 45 days to consider whether they want to except the severance agreement or to reject it. During this consideration period the company cannot alter or take back this offer. However, if the employee asks for more money or alteration to the agreement the company can consider their original offer as rejected, and they can refuse to offer a severance package at all, or they can make changes and resubmit another severance agreement at their discretion.

If the severance agreement is offered to valued employees who have been laid off at no fault of their own, then the severance agreement is a good will gesture that should be structured accordingly. In this scenario the severance agreement will need to provide the employee with an adequate pay-out, however, it must also be financially feasible for the company to handle. Two weeks severance pay is a common denomination to pay in this situation, but this is up to the company to decide.

Insurance coverage and participation in retirement plans also should be considered when drawing up a severance agreement, especially when creating a severance package for a good employee. The company may want to talk with their financial advisors and their personnel manager to see if they can pay for the employee’s insurance through a COBRA insurance program to keep the employee’s health care coverage active while they are looking for another job. These small steps to help good employees can help maintain the quality of the company’s public image, which is an important company asset.