What is a Severance Agreement?

Severance Agreements Explained | Illinois Employment Law

Video by Attorney Kevin O'Flaherty
Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
November 1, 2019

In this article, explain severance agreements, including: “what is a severance agreement?”,  “when are employers required to pay severance?”, “how can employers benefit from severance pay?”, and factors for employers to consider when creating severance agreements in Illinois.

What is a Severance Agreement?

A severance arrangement is a formal contract outlining the terms on which an employment relationship will end, usually tied to a mutually agreed upon amount of pay and/or benefits from the employer in exchange for the terminated employee to waive or release any potential claims he or she may have against the employer.

When Are Employers Required to Pay Severance?

Small businesses are not required to provide severance pay or other benefits to terminated employees by law, unless:

  • There’s a signed contract, oral promise, severance plan, or severance policy already in place
  • The business owner has already provided severance pay or benefits to past terminated employees who were in similar positions; inconsistently providing severance pay to some terminated employees over others may put a business owner at risk of legal liability
  • Many employees are being laid off at once or the business is closing altogether; Worker Adjustment and Retraining Notification (WARN) laws require some business owners to provide terminated employees with a necessary period of notice (usually 60 days) and continued pay and benefits throughout that period of notice.

While the law does not require severance agreements for most small business owners, a severance package may be a nice benefit to offer your employees. Many employers offer severance packages to long-term employees who have greatly contributed to the company. However, if you provide severance pay to one terminated employee, you should stay consistent. If you only want to deliver separation packages to employees above a specific management level or length of employment, identify clear, written stipulations in those agreements.

How Can Employers Benefit From Severance Pay?

Most small business employers cannot afford to pay severance out of the goodness of their heart.  Usually, severance is paid to an employee in exchange for a defined benefit to the employer.  These benefits may include:

  • A release of any claims the employee may have against the employer, including wrongful discharge or wrongful withholding of pay;
  • A non-disparagement clause, requiring that the employee refrain from saying negative things about the employer to third parties;
  • A non-disruptive transition of information about the business or the business’ clients from the employee to the employer;
  • An agreement by the employee not to solicit the employer’s customers or employees; or
  • An agreement by the employee not to compete with the employer.

Another way that employers can benefit from a severance policy is to treat it like a benefit due to all employees of a particular type in order to attract and retain talent.  

Factors to for Employers to Consider When Creating Severance Agreements in Illinois

Be sure to partner with an attorney to develop a severance package that protects both you and your employees. The happier you keep your terminated employees, the less likely they will take legal action against you. Employers should protect their company and fully understand the terms of the severance agreements they offer in order to minimize potential liabilities and protect the company from subsequent legal actions.  

At a minimum, employers should consider the following factors:

  • Some amount of pay should always be included in the severance agreement. Majority of severance policies standardize one to three weeks or 10-15% of the employee’s salary for every year of employment. For example, if the terminated employee previously made $500 per week and was employed for 3 years, his or her severance pay would total $1,500. Don’t be afraid to take work performance and expertise of role into consideration when determining the amount of severance pay.
  • Depending on your business’s size, you may consider offering continued health, life and disability insurance coverage for a limited amount of time. The Consolidated Omnibus Budget Reconciliation Act (COBRA) does require some companies who already provide group health insurance to offer terminated employees the opportunity to continue coverage. However, COBRA does not require employers to pay bills.
  • If your terminated employee was on track to receive a bonus, perhaps you can provide him or her with a one-time payment for a similar amount, depending on work performance.
  • Allow the terminated employee to leave an automated response on his or her former email address for a limited amount of time after termination, directing traffic to his or her new contact information.
  • Offer to pay for outplacement assistance.
  • Always include a release of claims or a covenant not to sue, even if you are confident there is no motive for the employee to take legal action against you.
  • Include a return of property section. Be sure to list out any of the company’s belongings that may currently be in possession of the employee.
  • Provide a strict deadline for the terminated employee to read, understand and consider your proposed severance agreement.

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When Are Employers Required to Pay Severance?

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