What do I need to know about severance agreements?

What do I need to know about severance agreements?

A severance agreement is usually used when an employer wishes an employee to leave the company and is willing to pay them a certain amount (severance pay) so that the employee will contractually agree not to sue the company for any claims they may have against the company.

Essentially, therefore, a severance agreement draws a line between the employer and employee whereby they can both walk away knowing their relationship has ended and there will be no future disputes.

Compromise agreements

Severance agreements are often referred to as compromise agreements or settlement agreements and in order to be enforceable the employee will need to be afforded independent legal advice so they are aware of exactly what they are signing. It is therefore common practice for a company to provide a compromise agreement to their employee and then pay their reasonable legal expenses for the employee to go to see a solicitor who will advise on the contents of the agreement.

A solicitor should take the employee through each clause of the agreement and explain exactly what the employer is requesting from the employee in order to receive compensation. The solicitor will then usually advise on whether the amount of compensation is fair in their opinion.

A usual severance or compromise agreement will include covenants on the employee whereby they must promise not to do certain things and in return they will receive compensation. This will usually include a provision that the payment from the employer is in full and final settlement of all claims. In other words, the employee could not take any grievance they had to an employment tribunal after signing the compromise agreement.

Covenants from employment contracts

An employee should bear in mind that they are, of course, already under certain covenants due to the employment contract. Essentially, the employment contract should have been adhered to and will most probably include restrictions on the employee in terms of contacting existing clients if they leave for another job.

The employment contract sets out the contractual relationship between the employer and employee. A severance agreement will seek to ensure that neither party subsequently takes action in regard to the employment relationship.

A common example is when an employer dismisses an employee but does so in breach of their employment contract (or in breach of their statutory obligations). In this situation the employee may have a viable claim against the employer in an employment tribunal; therefore, the employer may try to minimise the cost of having to run an employment case and the potential negative publicity this would create by paying the employee an amount of money and in return the employee will agree not to take such action.

Solicitors and severance agreements

It is important to contact a solicitor when using severance agreements as both the employee and employer will benefit by doing so. The employee will discover exactly what terms they are being asked to sign up to and find out what compensation they may or may not be likely to receive at an employment tribunal and then compare that figure to the compensation offer. The employer will want the employee to go to a solicitor since without this occurring the employee may be able to render the agreement unenforceable as they did not know what they were signing.

It should be noted that a severance agreement will not always be offered since the employer may have reacted perfectly reasonably and lawfully in terminating the employee’s contract whilst an employee may choose not to sign a severance agreement and instead take a claim to an employment tribunal.

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