4 Tips for Negotiating Severance Agreements When an Employee Is Let Go

Business people negotiating while sitting at a table

Letting employees go is never easy, but it's sometimes necessary. While ending a relationship with a staff member may prompt feelings of sadness, guilt, or uncertainty about the future, this is an important time for your company, and you need to be practical to protect your interests.

Often this means negotiating a severance agreement and separation package that addresses a few key issues. If you're not sure how to start with the process, here's what you need to know.

1. Severance agreements are usually optional

When you let an employee go, you usually don't have to enter into a severance agreement . However, if employees are operating under an employment contract, the agreement may entitle them to some type of severance package. If it does, you'll need to honor your contract lest you put your business at risk of being sued for breach.

Although you aren't required to negotiate on severance, doing so can save you from much bigger expenses in the future by giving you the chance to get the employee to make certain promises.

2. Include certain clauses to protect your business

Typically, severance agreements involve an exchange of items of value between employers and employees. Workers get severance pay while employers protect trade secrets and limit the risk of a lawsuit.

If you're willing to offer severance pay, make certain you get the employee to agree to several important promises in exchange. Depending on the circumstances, you may want the severance agreement with your departing staff member to include:

  • A non-compete agreement temporarily preventing the employee from taking customers with them, working for direct competitors, or starting a similar business in your geographic area.
  • A non-disclosure agreement preventing the employee from sharing business secrets.
  • A non-solicitation agreement prohibiting the departing employee from convincing other workers to leave your organization.
  • A non-disparagement agreement prohibiting the employee from making negative remarks about your organization or the termination.
  • A general release or waiver stipulating the employee won't attempt to claim unemployment benefits or sue for wrongful termination.

If the employee retained company property, use the severance agreement to specify what happens to it. You may allow the worker to retain it, but any property they keep should be considered non-taxable compensation.

3. Make sure you comply with the law

The last thing you want is for a carefully negotiated severance agreement to be declared unenforceable because it doesn't comply with state laws.

While the rules differ depending where your business is located, most states require you to give time for employees to look over agreements. You'll also want to avoid making the non-compete or non-disclosure agreement overly broad. Use plain language, avoid any statements that could be considered misleading, and ensure that waivers of claims against the company are clear and explicit. Finally, encourage employees -- preferably in writing -- to have a lawyer look at the agreement before signing.

It's also a good idea for you to talk with an attorney to make sure you're not including impermissible terms in your severance agreement. The cost of a lawsuit or your trade secrets being misappropriated is far more substantial than the cost of a simple consultation with an attorney.

4. Know what's customary

To make sure the employee actually has incentive to sign, you should make an attractive offer. But you don't want to be overly generous about benefits or severance pay -- so it helps to know what's standard.

It's common for employees to receive one to two weeks pay for each year of service. You may also want to offer continuation of health benefits for a limited time to sweeten the deal. And you can address in the agreement whether you're willing to provide letters of recommendation or serve as a reference.

Be ready for employee pushback during the negotiation process

There's one final thing to remember: Your first offer is unlikely to be the final offer. Leave room so if the employee asks for more, you'll be able to give a little.

And remember, while it may seem expensive to pay severance, protecting yourself from litigation -- and building a reputation as a company that takes care of its staff -- is worth the price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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