Severance agreements are often used between employees and employers when an employee is being laid off during a reduction in force by the employer. Employers can benefit from severance agreements by limiting their liability and by limiting potential future lawsuits from employees. Employees can benefit from severance agreements by receiving a lump sum payment to help tie them over until they are able to find subsequent employment.
Severance pay is not mandated by law and an employer is not required to provide any form of severance pay to a separating employee. In the event that an employment contract provides for severance pay, however, the terms of the employment contract will control and the employer will be contractually bound to the terms therein relating to severance pay. Often, employment contracts will stipulate that an employee terminated for cause is not entitled to severance pay even though the employee would have received severance in the absence of cause for termination. Courts have routinely upheld an employer’s refusal to pay severance in such cases.