A severance agreement, also called a termination or separation agreement is a written contract between a company and a terminated employee in which the employee is paid for relinquishing certain rights. The employees in question are almost always top executives.Those executives who receive severance agreements are most often:

1. Executives who are caught up in a round of layoffs; or

2. Executives who pose a potential liability to the company.

The crux of the agreement is the executive’s promise to drop his legal claims against the company in exchange for remuneration. A claim that the executive might have against the company would most likely be:

1. For wrongful termination;

2. For discrimination; or

3. For disputed wages or benefits.

No law obligates companies to offer severance pay. But if a severance agreement is used, it must allow the executive time to consider it and to revoke his acceptance. If an executive counteroffers the company’s agreement, he is effectively rejecting the company’s offer and risks losing it. Importantly, the severance agreement must offer the executive something additional for his decision to waive his rights, beyond what the executive is already owed.

There are a few basic elements to the severance agreement:

· Compensation (base pay, bonuses, stock options, even health benefits);

· Restrictive covenants (agreements not to bring claims against the company);

·Other agreements (company will provide letters of recommendation, help the executive get another job);

· Confidentiality and non-compete clauses (may not be overly broad so as to prevent an executive from working); and

· Boilerplate provisions.

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