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Are Severance Agreements Slimy Business? Is the common practice an ethical one? Our expert explains.

By Gael O'Brien

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.

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