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How can a severance agreement protect my business from lawsuits?

On Behalf of | Nov 19, 2021 | Employment Litigation

A lawsuit can make you lose significant business assets. Because of this, you must avoid doing anything unlawful that could give way to a legal claim. However, misunderstandings can always arise, especially when firing someone. If you are thinking about firing an employee that could have a valid reason to sue, you can consider creating a severance agreement. A severance agreement is a contract that specifies the terms of employment termination. In it, you can include a clause in which the employee must waive their rights to sue in exchange for some compensation.

The power of a severance agreement

A severance agreement dictates the terms of termination. In it, you can include a clause that states that the employee will lose their rights to sue if they sign it. To do this lawfully, you must give the employee something of value in addition to what they are already entitled to (like their pension benefits or payment earned during vacation). For example, a lump sum payment would be something that you could give the employee, as they wouldn’t get it if it wasn’t for the agreement.

Important considerations

You must create a valid severance agreement if you want to avoid future lawsuits from that employee. As mentioned, a severance agreement must offer some sort of additional compensation to the employee to be enforceable. You must also be careful when you give the agreement to your employee. To avoid misunderstandings, you must:

  • Give them enough time to think about the agreement before signing
  • Encourage them to seek legal counsel before signing
  • Explain to them the terms of the agreement
  • Ensure the agreement complies with federal and state laws

These steps are necessary if you want the court to consider your agreement as valid. If you don’t take any of those steps, your employee could argue that you pressured or forced them to sign it, in which case the agreement would not be enforceable, and they would be able to sue you.

Protection for your business

A costly litigation process can put your business at risk. However, you can avoid suffering losses by creating a valid severance agreement with some of your employees. You must keep in mind that the best way to avoid lawsuits is by complying with the law. Still, misunderstandings can happen, and it may be in your best interests to get protection from a costly dispute.