Severance Packages for Business Owners – What to Know

In the past, severance packages were considered only by large corporations and businesses when employees left a company. However, today both small and mid-sized companies use severance agreements to safeguard their corporate interests and keep an employee departure as amicable. Without a proper severance agreement, costly consequences may follow such as damaging your company’s reputation and or defending a lawsuit.

Social media giant Twitter, for example, is recently in the news about its severance package – or lack of one since Elon Musk acquired the company. Per the Los Angeles Times, several former employees are taking legal action against the company over the terms of their severance. Says attorney Lisa Bloom, who is representing one of the employees:

“Twitter employees like [Lee] were told in writing by HR or legal that after the acquisition they would get the same severance benefits that Twitter employees got before the acquisition,” Bloom said. “That is an enforceable promise” — and, she added, one that Musk has since broken.

You may be able to avoid these types of lawsuits by insisting that you have severance agreements with employees with confidentiality provisions.

A severance package is a separation agreement for compensation provided to an employee after he or she is let go or laid off, terminated, fired, retires, or resigns. This may include financial compensation, insurance, or other benefits. Not all terms of severance agreements are the same, and not all the circumstances under which severance may be offered are the same.

Tennessee businesses are not required to offer departing employees severance pay. However, if the company has agreed to offer a severance package, or if you have negotiated severance with an employee, you must follow through or risk legal action against you.

Advantages of a severance agreement

Severance packages have a variety of benefits and, as we stated earlier, can be a useful tool in maintaining a positive company reputation and employee goodwill. Some advantages of offering a severance package to employees include:

• Protecting your company’s proprietary information. A severance agreement can include asking departing employees to sign certain non-compete and non-disclosure agreements in return for their compensation package. This protects your valuable business information while still providing your employees the support they need.
• Avoiding legal action. You can add a provision to a severance agreement that states in exchange for compensation, the employee will sign something called a “release of claims.” This means the employee won’t file a lawsuit against you or the company for wrongful termination or other reasons, avoiding costly litigation.
• Retaining and recruiting talent. Interestingly enough, knowing a company has excellent benefits – even when leaving – attracts and retains great employees. When employees depart the company feeling satisfied, the company’s brand remains intact and it’s easier to attract new hires.
• Saving the company money. Of course, severance agreements cost money. However, NOT providing a severance agreement could cost the company much more in the long run. As noted above, you could damage your brand reputation, open yourself up to lawsuits, and have trouble attracting and retaining new employees.

Disadvantages of a severance agreement

Of course, there are pros and cons to everything. There may be situations where a severance package may not be appropriate or can even cause problems. Sometimes, a departing employee may view a severance agreement as an opportunity for negotiating for more money and benefits, delaying the off-boarding process and potentially costing the company even more money.

Or, an employee may refuse to sign a severance agreement at all and instead take public their grievances against the company. Further, if an employee does not sign any confidentiality clause and there is no other confidentiality provision in place, he may share that information or if there is no non-compete agreement, work for a competitor or yours. So, tread carefully in asking an employee to sign a severance agreement.

To talk to an experienced lawyer about what your company should include in its severance package and how to tailor agreements to specific employees, reach out to the Law Office of Perry A. Craft, PLLC today. We understand how to protect your business reputation AND your bottom line. We represent small and mid-sized companies. To schedule an appointment today, call or fill out our contact form.