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A severance agreement, also known as a separation agreement, is a contract between an employer and an employee establishing the terms on which the employee will leave upon termination. The employee usually agrees not to pursue any potential legal claims against the employer such as wrongful discharge, discrimination, or disputed wages. The employee exchanges this promise for certain benefits including money, a letter of reference, and/or job placement assistance.
Severance agreements are formed in various contexts and serve several purposes. For example, they can be negotiated by an employer and an employee as part of an orderly separation from employment, permitting an employee’s departure to be accomplished in an amicable manner. They also may arise when a company downsizes, with employees being offered a severance package as part of their involuntary termination. In this context they can cushion the blow associated with the loss of employment by providing a lump sum or periodic payments. This builds some good will for the company and allows them to go on with their business. Alternatively, when an agreement is extracted from an employer under the threat of litigation, a severance agreement can be a method of resolving a dispute without litigation.
An employee generally is not entitled to a severance agreement, as an employer is under no legal obligation to enter into one. The main exception is if the employer has an established severance plan which binds them to offer a settlement upon termination of employment. For a severance agreement to be valid, the employer must offer the employee something additional for the release from legal claims. It is not enough, for example, for an employer to ask for a release in exchange for wages, commissions, or vacation pay that the employee has already earned. Additionally, for the release to be enforceable the language must be explicit and clear, and the employee must be provided a fair opportunity to review it with a lawyer before the separation agreement is signed.
There is no standard formula for determining the amount of severance, as the negotiation for each agreement will be influenced by factors unique to each employment situation. Such factors include the length of employment of the employee, whether the employee is a salaried or an hourly worker, and the potential value of any of the employee’s potential legal claims against the employer. Although severance agreements tend to be more common among salaried employees, they can be negotiated by hourly workers as well.
An employment lawyer can serve an important role in the negotiation of a severance agreement. The lawyer can review the agreement and evaluate its likely effectiveness under the law. Plus, the lawyer can determine whether the employer has possibly violated any of the employee’s rights, evaluate any claims the employee may have against the employer, and then attempt to leverage a larger settlement for the employee based on these claims. It is not uncommon for a lawyer to review a separation agreement, ask some questions and then determine that the employee is owed a lot of money for overtime or other unpaid wages.
In determining whether or not to sign the severance, an employee should consider the potential value and likelihood of success of the claims compared to the severance package offered by the employer. Based on this comparison the employee can then decide whether to sign the severance agreement or to pursue a claim against the employer.
Most Illinois attorneys who review severance agreements charge a flat fee to do so, usually around $1,000. In some cases the lawyers that we recommend will waive this fee when it is clear that the employee is owed more money, but most people should expect to compensate the lawyer for their time. It typically takes two hours of time for a lawyer to review a document and discuss it with the employee.
If you have questions about separation agreements or would like a recommendation to an attorney that can help you, please do not hesitate to contact us.