What is a Severance Agreement?
A severance agreement is a contract that is offered to an employee at the end of their employment with their employer.
In a typical severance agreement, an employee is given a monetary payment in exchange for waiving their right to sue their employer for employment related claims.
Thus, if an employee signs a severance agreement, the employee will not thereafter be able to file a lawsuit against their employer for an employment related claim.
Does an Employer Have to Offer an Employee Severance Pay?
No. An employer is under no legal obligation to provide an employee with any severance pay - not even a dime.* At the same time, an employee is under no legal obligation to agree to the terms of an employer's proposed severance agreement.
Entering into, or not entering into, a severance agreement is completely voluntary for both an employer and an employee.
If Employers Do Not Have to Offer Severance Pay, Why Do They Do So?
Employers like severances agreements because they provide certainty – the employer knows that after an employee signs a severance agreement, it will not thereafter be sued by that employee for an employment related claim. This is valuable to employers because it allows employers to move forward with their business and not worry about, or face the consequences of, being sued by their former employees.
A less cynical view is that employers offer severance pay to employees in recognition of the employees' service to the company and/or to help employees financially following the end of their employment with the company. Even if these altruistic reasons are true, when employees accept severance pay and sign a severance agreement, employers still receive the benefit of having the employee waive their right to sue the employer for employment related claims.
What is the Typical Amount Offered to an Employee as Severance Pay?
There is no typical amount that is offered to employees as severance pay. Severance pay can vary from one week of pay to one year of pay. Some employers base the amount of severance pay offered to an employee on the amount of time that the employee spent working for the company. For example, an employee may be offered two weeks of severance pay for each year that the employee worked for the company.
What Amount of Severance Pay Should an Employee Receive?
There is no specific formula to determine what is a reasonable amount of severance pay. Rather, the determination must be based upon a) the amount of severance pay the employer has offered to the employee, and b) whether or not an employee has any viable employment related claim against the employer.
If an employee does not have any viable employment related claims against their employer, then the employee does not have much, if any, leverage to negotiate for more severance pay than what the employer has offered. As such, the employee most likely will be forced to accept whatever amount the employer has offered.
Conversely, if an employee has viable employment related claims against their employer for which they could file a lawsuit and potentially obtain damages, an employee should not agree to the terms of a severance agreement, and waive their right to pursue their claims in court, if the severance payment offered is not sufficient. Such an employee, with actionable employment related claims, has leverage to negotiate with the employer for a higher severance payment. A letter from an attorney asserting the employee's employment related claims and stating the employee's willingness to pursue these claims in court can often result in the employer offering a higher amount of severance payment to the employee. It will then be up to the employee to decide whether to accept the severance payment or pursue their claims in court.
Conclusion
Because an employee forfeits their right to pursue employment related legal claims against their employer when they sign a severance agreement, an employee should always consult with an attorney to determine whether they have any potential employment related claims against their employer and if so, if the severance pay offered to the employee is a reasonable amount in exchange for waiving their right to pursue their claims in court.
*If an employee is employed pursuant to a collective bargaining agreement or a contract, an employer may then be required to provide an employee with severance pay pursuant to the terms of the collective bargaining agreement or employment contract.