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What businesses should keep in mind about severance agreements

It makes sound business sense for an organization that is parting ways with a high-level employee to make the decision to have a severance agreement drawn up. That's because while it may end up costing them up-front in the form of additional compensation, enhanced benefits or other “in kind” consideration, it can nevertheless grant much-needed peace of mind going forward.

It's worth noting, however, that experts indicate that businesses should be aware at the outset of any actions relating to the execution of severance agreements that the language of certain provisions will invariably end up being challenged by the employee such that further negotiation may prove necessary.

  • Release of claims: Businesses will typically draft this provision in such a way that the employee will forfeit any and all legal claims they may have against them. While this is understandable, the reality is that the employee may only be willing to do this if the release of claims is mutual, meaning the business releases any and all claims it may have against the employee.
  • Restrictive covenants: While there is a very good chance that the business already had the employee agree to no-solicit and/or non-compete agreements in the initial employment contract, it may seek to expand upon this in the severance agreement. In these situations, or where such terms are being introduced for the first time, experts indicate that businesses should be prepared for the employee to either challenge their scope and timeframe, or reject their inclusion altogether.
  • Confidential information: A commonly included provision in severance agreements is one requiring the employee to keep its terms confidential. Experts indicate that while most employees won't object to this, they may seek to carve out certain exceptions such as accountants, attorneys, financial planners and, of course, immediate family.     

What the foregoing serves to illustrate is that businesses should give very serious consideration to retaining the services of an experienced legal profession to handle all matters relating to severance agreements from the drafting to the negotiations. Indeed, this too can grant much-needed peace of mind going forward. 

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