The Pros and Cons of Severance Agreements

Are you a small business owner who wants to fire an employee but are concerned about a wrongful termination claim? You may want to consider entering into a separation agreement with the employee. A separation agreement, also known as a severance package, is when a company offers to pay a terminated employee a specified amount, such as two weeks’ pay, in exchange for the employee’s promise not to sue you, disparage you, or compete with you.

Some employers routinely offer exiting employees a separation agreement, while other employers only ask employees who might have a legitimate legal claim against the company, or who seem especially motivated to sue.

Below we’ve outlined some of the pros and cons to using a separation agreement. But keep in mind that the use of a separation agreement will be highly dependent on the facts and circumstances of each employee case. For instance, special laws apply when offering employees over the age of 40 separation benefits.  Thus, it is always wise to consult legal counsel before deciding whether or not the use of a separation agreement is a good idea.


  • Gives the employer peace of mind. Separation agreements allow employers to sleep more soundly at night, free from worry of a threatened lawsuit.
  • Reminds the employee of his or her continuing company obligations not to compete with, or disparage you.
  • Provides the employee, or group of employees, with continued income if terminated due to events outside of your control.
  • Gives employees a sense of company loyalty, despite the unfortunate circumstances.


  • Increases company costs. Some companies may not have the resources to offer employees a separation payment.
  • Could plant ideas in the employee’s head that you are trying to cover something up, which could cause the employee to refuse to sign it and consider suing you, which may have not otherwise been the case.
  • Could result in litigation over its discoverability in cases brought by other terminated employees (where a separation agreement was not used).

As you can see, separation agreements are not a one-size-fits-all tool and an employer should weigh all of the costs and benefits before deciding whether or not to offer the employee separation benefits. However, when used effectively, separation agreements can help relieve headaches and ward off potential lawsuits.

By: Jenna Macek – 05/15/16

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