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The phrase “severance agreement” is one that is increasingly common in UK parlance. Also referred to as a settlement agreement, or sometimes a compromise agreement, what we call the agreement itself is of less importance than what goes into it.
A severance agreement, as we will call it here, comes into play when a company and an employee agree to go their separate ways. They circumstances leading to the departure can be varied, but the rationale behind the agreement is always the same. The employee will depart quietly, the employer will pay some financial compensation and neither party will create any future trouble or seek any additional recovery from the other.
Legally binding
A severance agreement is legally binding, provided the correct process is followed. One of the core aspects to it is that in signing, the employee waives his or her rights to make a claim against anything that the agreement covers. Typically, an employer will wish to have such an agreement when they seek to terminate an employee’s position without proper reason.
There are numerous situations in which this might arise. Perhaps the business is going through difficult times, or changing its strategic focus and it can manage without the person or the role they fulfil. Other times, it can be down to a personality clash – if an individual does not get along with coworkers or management, even though they do their job perfectly well, it can sometimes be better for all concerned if they go their separate ways.
Whatever the reasons behind it, a severance agreement is a critically important document, and the employee is entitled by law to independent legal advice about the Agreement. The employer will usually foot the bill for arranging this, and the advisor will sign a form to confirm that the advice has been given. Without it, the severance agreement is not legally binding.
Negotiating the terms
No two severance agreements are the same, although they will mostly follow a similar basic structure. Confidentiality will usually form a major component. The parties will typically agree to keep the content of the agreement secret, and there will often be additional clauses regarding confidentiality as to the activities undertaken during the individual’s employment and perhaps the circumstances leading to the severance.
For the employee, however, the key term within the agreement is the financial settlement itself, and this is another reason why it is so important to take independent legal advice. In most cases, it is in the employer’s interest to get the agreement signed and the matter closed as quickly as possible. This puts the employee in a strong negotiating position, and it is not uncommon for an initial severance proposal to contain a “lowball” offer, in anticipation of this being negotiated up in time.
Ultimately, a well written severance agreement should be a win / win for both sides, allowing them to part amicably and painlessly. Just remember to always take professional advice before putting pen to paper.
