Severance Agreement

Illinois is an at-will work state. This means that employers don’t need to offer employment contracts to their employees. As a result, there is no prior agreement between employer and employee as to the terms and conditions regarding the termination of employment. Under these circumstances, many employers will use a severance agreement at the time of termination to define such terms and conditions. In fact, both employer and employee may have good reasons for signing a severance agreement.

A Severance Agreement is an Agreement

An employee can’t be forced into signing this type of agreement. In fact, employees must typically be given a certain amount of time to consider the agreement. Federal law requires employers that are terminating employees above 40 years old to give them at least 21 days to consider the agreement.

The primary benefit for employers is that the agreement will inevitably include a clause by which the former employee agrees to either withdraw or waive any potential claim against the employer as regards to their employment or termination. Litigation is an employer’s worst fear when it terminates an employee, so this clause is their key motivator.

Employees may want to sign the agreement because the employer will pay them severance if they do. Absent a severance contract, employers aren’t obligated to pay employees any money upon termination. This doesn’t include any money the employer might owe the employee regarding unused vacation or sick time, or any other money actually owed to the employee.

Common Clauses and Issues to Consider in a Severance Contract

While any severance contract will include the two issues noted above, most will also include other common clauses.

  • Noncompete – A noncompete clause can limit where the terminated employee can find future employment.
  • Confidentiality – It is often in both parties’ interest to keep the terms of the severance contract confidential.
  • Nondisparagement – This clause prohibits either party from making disparaging comments about the other.
  • Eligiblity for unemployment – Accepting severance pay may make someone ineligible to receive unemployment benefits. Under Illinois law, people do remain eligible for unemployment benefits if they receive a severance package. However, employers can still insert a clause that an employee does forfeit those benefits since the employer has in essence paid for those benefits as well.
  • Continuation of health benefits – This type of clause would clarify when employer health benefits end, who is responsible for paying employer-provided health insurance, and other related issues.
  • Future references – This clause sets out how the employer will respond to calls from prospective employers about the terminated employee.
  • Future employment – This clause clarifies the circumstance of how or whether the terminated employee may be rehired by the employer and what, if any, impact this has on the severance package. For example, if the employer’s circumstances change and they’re able to rehire an employee shortly after having terminated him or her, the employer might want the option to offset some of the severance package.