A Severance Agreement Must Have Consideration To Be Enforceable

What is the consideration for the severance pay agreement? If the employee is already entitled to everything that is in the severance pay agreement there is no consideration and there is no reason for a terminated employee to sign the release of all claims. If the employer wants the release agreement to be valid there must be consideration paid in exchange for the signature on the release and waiver of all claims. The most common forms of consideration are either a lump sum payment or extended salary over a certain number of work weeks or months. Consideration may also include extra health insurance benefits and or mutuality of the claims released in the severance agreement.

There are pros and cons when considering an extended salary severance agreement. A lump sum payment eliminates the possibility the employer could stop paying the extended salary. One way to deal with this problem is to specify in the release agreement that failure of the employer to pay is a material breach and will entitle the terminated employee to recover attorney’s fees to enforce full payment of the severance pay agreement. With extended salary there is the possibility that the employer company may go bankrupt and stop paying an extended salary agreement. Further with extended salary, if the employer believes the terminated employee breached the terms of a severance agreement the employer may stop paying the extended salary. With a lump sum payment allocated to weeks already worked, a terminated employee may be able to start receiving unemployment insurance upon termination. However one con of a large lump sum payment, in one paycheck. is that the amount of tax the employee would normally pay may increase.

The learning point here for both employees and employers is make sure the severance agreement has consideration or something extra that the employer is not already obligated to provide the employee. Remember, If there is no consideration, the severance pay package release of all claims may not be enforceable.

For more information about severance agreements or severance pay package legal review contact employment law attorney Jessica Juarez at jessica@stoll-law.com or call her directly at 415-762-1383. Follow us on Twitter @albertstoll