Seasoned Trial Attorneys, Exceptional Results

  1. Home
  2.  » 
  3. Commercial Litigation
  4.  » The benefits of severance package for corporations

The benefits of severance package for corporations

A severance package is a negotiated settlement between an employee and an employer that details terms that will apply upon the termination of their working relationship. These contracts often come into play during unfortunate events such as downsizing. However, the company and employee may decide to mutually part ways if their working relationship is facing challenges.

With such an arrangement in place, payment is offered as compensation for an employee who agrees to forgo the right to sue the company. The employee must sign a severance contract that is left with the company.

Why a company should consider severance packages for employees

Severance packages are not a condition precedent that must be granted to every employee upon termination of their employment term. Therefore, they must be granted sparingly and on a need-only basis. The major reasons for offering severance pay are as follows.

Avoiding protracted litigation

There are situations in which terminating an employee will inevitably lead to litigation. This process might be long and windy. Ultimately, if the company was at fault, it would be ordered to pay the employee benefits. In addition, the company would have to pay legal fees defending the suit as well as costs if awarded by the court. Therefore, it would be wise to have a severance package in place to avoid such a situation.

Avoiding bad press

When an employee leaves an organization disgruntled, there is no telling what that they might do. During a litigation process, the company may wind up in the news, which could scare off potential investors who would not want to be associated with any bad press.

Drafting severance agreements

There are several reasons why it is important to evaluate the situation before drafting or signing a severance agreement.

First, the company should apprise itself of the situation and consider the possibility of a shakedown by a disgruntled employee. Second, the company must assess if the intended severance package passes legal muster. As a severance agreement is contractual in nature, contract laws are applicable. To this end, there are contracts that are null and void from the get-go. The effort used in drafting them would be futile and the intended protection of a severance package would be nullified. A severance contract would be void if it has been obtained through duress, if it is unconscionable or it was obtained through fraud or to conceal fraudulent activity. Therefore, it is important to have a legally sound document.  

Severance agreements are quite useful. However, they are not applicable for all occasions. Therefore, they should be used only when it is essential must conform with the law to take effect.