What Is A Severance Versus Separation Agreement

What’s the difference between a severance agreement and a separation agreement? When it comes to an employee leaving your company, these two terms are often used – and confused. For both legal and practical purposes, you will want to use them properly and in context. Let’s explore the differences.

What These Documents Have in Common

Both a severance agreement and a separation agreement outline the terms of the dissolved relationship between the employer and employee. It outlines any monetary compensation or benefits that the employee may receive at the time of termination. It might also outline the dates, circumstances, and legal agreements, such as non-competition or non-disclosures.

When You Deliver and Sign the Agreement

Here’s the biggest difference. Severance agreements are offered and signed as part of a hiring process. It becomes part of an attractive benefits package. It may include monetary stipends that are earned over time, and are paid out at the time of termination. It also explains the circumstances of a termination that would earn any monetary or benefit compensations. For instance, termination for poor conduct may not be eligible for certain things.

On the other hand, a separation agreement is offered and signed at the time of termination. Any kind of monetary compensation is likely to be a flat amount, rather than a percentage earned over time. In many cases, no compensation or benefits are offered.

Subtle Differences

The thrust of a separation agreement is a legal one. It basically acts as a legal safeguard against the employee suing you later for an unlawful termination. In other words, it’s not really about the money.

On the other hand, severance agreements can be more robust – offering financial compensation as well as continued health care benefits, etc. Because they happen at the time of hiring, they are more of an attractive reason to join a company. They let an employee know that they would have a bridge or cushion in the event of an untimely termination.

Know What You Need to Know for Hiring and Firing

Because of both the obvious and underlying differences between these terms, it’s important to use them distinctly. This will save you from confusing conversations with your employees – as well as from any legal complications from implying more than you intend. Have more questions about terminations? Give us a ring. 

Legal Disclaimer: This post is intended for informational purposes only, and does not constitute legal information or advice. This information and all Coastal Payroll materials are provided in consultation with federal and state statutes and do not encompass other regulations that may exist, such as local ordinances. Transmission of documents or information through the Coastal Payroll does not create an attorney-client relationship. If you are seeking legal advice, you are encouraged to consult an attorney.