When Drafted Wisely: The Severance Agreement Is A Necessity in the Corporate Toolkit

As identified in an earlier article, careless drafting of severance agreements, such as by relying on the confusion surrounding restrictive covenants named non-solicitation clauses, will inevitably lead to an unraveling of employer protections.

In a time when corporate America stands on the precipice of change, severance agreements, long a staple in the business world, are a subject of spirited debate. Often misunderstood, they serve as an important tool in a company’s arsenal, offering both economic security to the departing employee and legal protection to the employer. It’s a balance that is as delicate as it is necessary.

Severance agreements are not merely transactions; they’re strategic agreements designed to safeguard both parties during employment transitions. For the departing employee, the severance package offers an essential safety net during the uncertain period of job transition. These packages typically include a lump sum payment, benefits extension, and sometimes, outplacement services to assist in finding a new position.

Yet, beyond this, severance agreements also serve a greater purpose. They offer closure, a defined end to the professional relationship. With the signing of a severance agreement, both parties can move forward with certainty and finality.

For corporate America, the value of the severance agreement lies in its ability to manage risk. These agreements often include provisions such as non-disparagement clauses and legal claim waivers that protect the company’s reputation and limit the potential for costly and time-consuming litigation.

The inclusion of these clauses is not a cynical exercise of corporate power. Rather, it’s a reflection of the reality that businesses operate in a complex, litigious environment. These protections allow companies to continue their operations undisturbed, focusing their energy and resources on growth, innovation, and employee wellbeing.

However, corporate America is aware of the need for balance. It is essential that these agreements do not inhibit an employee’s future employment prospects, and that they are not used to mask inappropriate behavior or unfair practices. High-profile cases in the pandemic era have underscored the importance of maintaining ethical standards and transparency, lessons that resonate across the corporate landscape.

Critics argue that restrictive covenants like non-solicitation, non-compete and non-disparagement clauses unfairly restrict an employee’s professional mobility. While it’s true these provisions can limit certain actions post-employment, it’s essential to understand that the objection should be to protect trade secrets and client relationships, rather than to punish the departing employee. Restrictive covenants are falling out of favor, and employers who fail to adapt may face a harsh repercussions.

There’s also an increasing trend among corporations to provide more comprehensive separation packages to lower-level employees, not just top executives. This is part of a larger shift toward employee-focused policies, recognizing that every employee’s contribution is essential to the organization’s success.

The challenge lies in creating severance agreements that reflect both the needs of the corporation and balancing the cost of purchasing employee rights. This is where negotiation plays a crucial role. And the process of negotiation can ensure that the agreement meets the needs of both parties and withstands any legal challenge.

The role of the severance agreement in the modern corporate landscape is clear. It serves as a crucial bridge during periods of transition, a tool to protect corporate interests, and an opportunity to show good faith to departing employees. The task for corporate America is to continue refining these agreements, ensuring that they remain fair, balanced, and beneficial for all parties involved.