8 Key Provisions to Include in an Employee Severance Agreement

Estate Planning in New Braunfels, San Marcos, and Seguin

By Beverly Davidek

Oct 18
Davidek Business Law

At some point, it’s virtually inevitable that some of your staff will leave your employment. Whether they leave of their own volition or they’re terminated, it’s simply the nature of running a business that not all employees will be around forever.

In some cases, it can be a good idea to offer departing employees a severance (separation) agreement, especially if the worker was laid off or let go for reasons other than serious misconduct. Such agreements are vital in protecting your company from lawsuits and other potentially detrimental actions by the departing employee.

These agreements may seem somewhat expensive up front, but they protect against even larger expenditures of time and money down the road. If your business is relatively small, you can be financially wiped out by just having to defend your business in court.

The primary objective of severance agreements is to shield your company from legal liability. However, these contracts can also protect your business from numerous other negative ramifications, such as defamation, loss of trade secrets, and the “poaching” of your most valuable employees.

To this end, you should consider including provisions in your severance agreements aimed at preventing all types of damage, not just lawsuits. Here are a few of the most common terms:

1. Confidentiality

 A confidentiality provision requires that the employee keep the existence and terms of the severance agreement confidential. By keeping the agreement private, you can avoid the appearance that the employee in question received special treatment.

What’s more, such confidentiality also prevents other employees from seeking out their own severance packages or asking for similar terms.

2. Non-disparagement

A non-disparagement clause prohibits the employee from making negative or disparaging statements—whether orally or in writing—about your company. This helps prevent the individual from bad-mouthing your brand and tarnishing your reputation once they leave your employment.

3. Non-disclosure

A non-disclosure clause prohibits the employee from disclosing your company’s trade secrets and/or other confidential information. Hopefully, you included a non-disclosure agreement in the employee’s original employment contract, but if not, adding it here can help plug this gap. 

The provision should be worded broadly enough to include not just your most precious trade secrets, but all of your company’s sensitive confidential information. This can include things such as customer lists, legal information, financial data, internal communications, vendor lists, phone numbers, email addresses, and other items. 

4. Non-competition

If the employee had access to sensitive information about your company, you should consider adding a non-competition clause prohibiting him or her from competing with your business for an agreed-upon amount of time, within a specific geographic area. This prevents them from working for an existing competitor as well as starting a competing business of their own.

5. Non-solicitation

In addition to a non-compete, you might also think about adding a non-solicitation clause that prohibits the employee from poaching your company’s clients, suppliers, employees, and other representatives. While non-competition and non-solicitation clauses cover very similar issues, neither one offers total protection on its own, so they both should be considered to safeguard your business from all angles of a competitive attack.

6. Return of company property

Though it might seem like common sense that a departing employee should return all of the equipment they used while on the job, adding a clause requiring them to do this adds an extra layer of protection.

This is especially true today, when employees are often issued numerous items and devices, such as keys, laptops, smartphones, keycards, and badges. Seeing that an entire universe of company data can be stored on something as small as a flash drive, this provision can be especially critical.

7. No admission of liability

This provision keeps the agreement neutral by stating that the agreement does not constitute any liability by either the company or the employee.

8. Governing jurisdiction and venue

This provision stipulates the specific state and venue where any lawsuits alleging a breach of the severance agreement must be filed. This allows you to ensure that if the contract is ever contested, the case will be tried in a location that’s most convenient for you and your business.

While severance agreements are crucial to protecting your business, if they’re not drafted properly and kept up to date, they can actually do more harm than good. Given this, I recommend you have your agreements reviewed to ensure they are legally sound and that they comply with federal and state employment laws. 

Whether you need a brand new severance agreement drawn up or you’d like me to review an existing agreement, I can help. Contact me today to learn more.

This article is a service of Beverly R. Davidek. I don’t just draft documents; I ensure that families and business owners make informed and empowered decisions about life and death, for themselves and the people they love. I also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, insurance, financial, and tax systems you need for your business.