Severance arrangements: Overview, definition, and example
What are severance arrangements?
Severance arrangements refer to the terms and conditions outlined in a contract or agreement that govern the compensation and benefits provided to an employee upon termination of employment. These arrangements are typically negotiated and set forth in employment contracts or company policies and may include financial compensation, benefits continuation (such as health insurance), outplacement services, and other forms of support for the employee after they leave the company. Severance arrangements are designed to ease the transition for the employee and ensure that they receive fair compensation following the end of their employment, whether the termination is voluntary or involuntary.
Severance arrangements are commonly offered to employees who are laid off or terminated without cause, though they can also apply in other situations such as retirement or mutual separation.
Why are severance arrangements important?
Severance arrangements are important because they provide financial security and support to employees who are transitioning out of a company. For employees, severance can help mitigate the financial impact of losing a job and assist with finding new employment. It can also serve as a way for employers to maintain goodwill and protect themselves legally by reducing the likelihood of legal disputes after termination.
From a legal perspective, severance arrangements can help employers fulfill their obligations under labor laws, reduce the risk of wrongful termination claims, and ensure that employees are treated fairly when they leave the company. These arrangements can also provide clarity regarding the terms of departure, helping to prevent confusion and conflict.
Understanding severance arrangements through an example
Imagine an employee, John, who has been with a company for 10 years. Due to company restructuring, he is laid off. His employment contract includes a severance arrangement that stipulates he will receive two weeks of salary for every year of service, which in this case amounts to $20,000. Additionally, the company agrees to continue his health benefits for six months and provides him with career counseling services. These terms are outlined as part of his severance arrangement to help him transition to a new job.
In another example, a high-level executive is offered a severance package that includes a lump sum payment, continued access to company benefits for a set period, and a non-compete clause. The executive negotiates the severance arrangement to ensure that the terms are favorable to their financial situation and career goals, helping them make the transition after stepping down from their position.
An example of a severance arrangement clause
Here’s how a severance arrangement clause might look in an employment agreement:
“In the event of termination of employment, the Employee will be entitled to severance pay equal to [X] weeks of salary for each year of service, with a minimum of [X] weeks of pay. The Company will also continue health benefits for [X] months following the termination date and provide outplacement services to assist the Employee in securing new employment.”
Conclusion
Severance arrangements are an essential aspect of employment contracts, providing both the employer and the employee with clear terms regarding compensation and benefits upon the termination of employment. These arrangements help smooth the transition for employees leaving the company and offer employers a way to handle terminations in a fair and legally sound manner. Severance arrangements vary based on the individual’s position, tenure, and the circumstances of termination, but they are generally designed to offer financial support and assistance during a challenging period.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.