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Severance Agreements

Some of the time, when an employer terminates or “lays off” an employee, the employer may also present the employee with a proposed severance agreement, which typically offers some additional pay and/or benefits and requires the employee to sign a release of any claims against the company and its representatives in order to receive the additional compensation.

Sometimes severance arrangements are required by a company severance plan or severance policy, or required by an individual contract entered into between the employee and employer earlier on. Other times, the company just decides to offer severance for reasons particular to the individual situation.

Some of the Common Questions Are:

  • Is the agreement fair? For example, what is a fair severance payment?
  • Is there some formula that is binding on the parties?
  • Should severance payments be paid in one payment or in a series of payments?
  • Are these payments subject to payroll tax withholding?
  • What about payments for health insurance premiums in severance situations?
  • What impact will severance agreements have on the vesting of stock options or on deferred compensation?
  • Can an employee revoke the agreement after signing it, and if so, how much time is allowed?
  • What will be the impact of signing a severance agreement on obtaining Unemployment Insurance benefits?
  • What will be its impact on a pending workers compensation claim?
  • If it also involves retirement and there are more than one options for taking retirement benefits, which is the best?
  • What about asking for references, and/or obtaining a reference letter as part of a severance negotiation?

How many of these questions will come up in any particular case will depend on the specifics of the situation. We are frequently called upon to explain, review, draft and negotiate severance agreements.