It is an unfortunate fact of business ownership and management that eventually you will have to terminate someone’s employment with your company. Whatever the reason for the termination, you will need to consider what to offer to your employee as they transition out of your business and into their next venture. This means that you will need to negotiate a fair severance package for your employee. What “fair” entails will be determined by you, your financial advisor, your attorney, and your employee. With more and more business struggling to stay afloat in the era of COVID-19, this is something you should consider sooner rather than later. While you may not need it now, you never know what may be coming just around the corner.
The purpose of any severance agreement is to provide a measure of support to an employee who is exiting your company, to protect your business from any vengeful former employees, and to boost employee morale during times of economic instability. Not all businesses are required to provide a severance package to their exiting employees. Even in businesses that may be, certain types of employment are not guaranteed a severance package should their contract come to an end. In these instances, some employers opt to offer a severance package as a gesture of good will. It is up to you and your attorney to determine what you will or will not offer in these circumstances.
What To Include
Generally speaking, a severance package typically includes some measure of severance pay which goes beyond providing the last paycheck. This pay will be outside of the scope of the time the employee works. It can include any commissions, bonuses, deferred compensation payouts, stock options, or unreimbursed business expenses to name a few. This would also encompass payouts of any unused vacation or PTO time as well. Speak with your attorney for a detailed explanation of what compensation can or should be included.
Some employers also offer to continue providing healthcare benefits for a period of time after termination of employment to act as a bridge for their former employee until they can find new coverage or new employment. Many employers in this scenario also opt to offer healthcare benefits under COBRA, which is something your attorney can discuss with you.
Another aspect of many severance packages is the inclusion of non-compete and confidentiality agreements. Many employers put these agreements into the hiring package these days. Including it in a severance contract is more of a reminder to the employee of the terms of their contract.
Another option to consider, especially these days when downsizing is more frequent, is offering “outplacement services” to your departing employee. This includes assistance with additional career training or resumé writing to help your employee find work elsewhere.
While you are drafting your severance offerings, some additional things to consider are non-disparagement agreements that prevent an exiting employee from publishing or otherwise making any derogatory comments about your business. Another consideration is non-solicitation of employee or customers. This prevents an employee from recruiting your current employees or customers into their new business venture. Lastly, consider including a general release of liability and a dispute resolution clause. That protects your business from litigation by the former employee.