Ethics Coach

Are Severance Agreements Slimy Business?

Are Severance Agreements Slimy Business?
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This story appears in the February 2016 issue of Entrepreneur. Subscribe »

Q: We had to lay off an employee who wasn’t a good fit for us. I wanted to offer her a severance package of five weeks of income, to help her and her family as she searches for a new job. But I read that I should also have the employee sign a severance agreement. I know it’s common, but it feels slimy. What are the ethics here?

A: Your instinct to offer severance is compassionate and appropriate. It’s also the right message to send in the marketplace: Your company treats people with respect even when things don’t work out. But the accompanying agreement isn’t slimy at all. It’s good business.

Severance agreements are business documents that clarify expectations, says Elaine Varelas, managing partner of Boston-based outplacement firm Keystone Partners and an expert in separation negotiation. Employees often sign written agreements when they start a job; the same should be true when they end it. The agreement can outline what assistance an employer will provide -- for example, additional weeks of salary, benefits continuation, or career-transition assistance, she says. It also spells out what the employer needs in return, such as acceptance of the severance amount; release of liability; in some fields, reiteration of a noncompete; perhaps an agreement not to discuss the severance or badmouth the company. “The assumption is the company and employee both went into an employee/employer relationship with good intentions, and there are many reasons things don’t work out,” Varelas says.

You can be a responsible leader even as you’re parting ways. Employees often fear signing legal documents that they don’t understand, Varelas says, so you should help them feel comfortable doing it. Give the employee ample time to review it and consult with a family member or expert. Not all binding legal documents have to be written in legalese; yours can be straightforward and supportive. The goal, Varelas says: Make the document feel like “a mutually supportive relationship.”

Now here’s the bigger question: How do you avoid future situations where an employee isn’t “a good fit”? Have you and your team clarified what behaviors, attitudes and values -- in addition to skills and competencies -- create success for a team member, the business, and clients or customers? Are you clear about that in interviews? Or do you assume that a new person will catch on to the culture and contribute accordingly? (Bad plan: Not everyone has psychic abilities.) Your team surely has thoughts on how to screen job candidates and help them succeed -- if you don’t know those thoughts, you should. While you’re at it, ask how you can improve communication. If you believe you’ve covered these bases, consider your team: Are they so close knit that new arrivals have trouble fitting in? Once you solve this riddle, you can put your efforts into helping people start right, rather than worrying about how they leave.