Generally, a severance contract is a contract that pays an employee an amount of money for a release of liability with respect to actions of the employer, and confidentiality and nondisclosure obligations with which the employee must comply. A common way to calculate how much to pay the employee is one week of pay multiplied by the number of years the individual worked at the business. While this may seem like just another expense, with little benefit to the employer, in certain circumstances they can save the employer a great deal of money.
It is impossible for an employer to only have amicable terminations of employment, and to forever avoid the potential litigation stemming from terminations. When an employee’s termination is particularly contentious or you believe that the employee is a litigious individual, it is a good idea to have a severance agreement signed upon termination. If the former employee decides to sue whether their claim has merit or not, it will still be very expensive to defend against the claim. Often times, the additional expense of one to two weeks of severance pay will have little effect on the employer’s ultimate bottom line, but a lawsuit can bankrupt a business.
I recall a case a law school colleague of mine worked on while he was in law school. The facts of the case surround a relationship between a female plaintiff and a female HR manager. They exchanged explicit texts with one another, and these texts were the bulk of the evidence. Unfortunately for the plaintiff, she lost her phone and only had screenshots of the text message conversations. The evidence surrounding this claim was clearly limited at best, but the employee was very angry and a great witness. The employer felt that the employee was just another disgruntled employee and he had dug his feet in giving no option of settling. He was confident that the jury would rule in his favor, but you can never be sure what a jury is going to do.
The case began in early 2015 and the trial was set for early 2018, a little over three years later. The employee sued under Title VII of the Civil Rights Act of 1964, which provides for attorney fees to the prevailing party. The first settlement offer was made in 2015 for $10,000. Two weeks before trial, a settlement offer of $50,000 was made. The jury ruled in favor of the plaintiff, and after attorney fees were added the judgement was over $200,000. In addition to the judgement, the employer had to pay their own attorney to defend this case and inevitably lose. This great expenditure ended up nearly putting the business into bankruptcy.
The plaintiff had worked at the business for 4 years and worked an average of 25 hours a week at $10 an hour. If the employer offered her 4 weeks of severance pay, she would have likely taken it and the employer would have had a release of liability. This would have cost the employer the $1000 in severance pay, but it would have saved them hundreds of thousands in potential liability that they ultimately faced.
Here at The Weil Law Group, PA our focus is on protecting your small business. If you have any questions or need any help call 954-603-7603. We are here to help!