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Severance pay disputes can lead to costly employment litigation

On Behalf of | Aug 24, 2023 | Business Law

When companies hire new workers or promote existing employees, the process usually involves negotiating and signing an employment contract. That contract may address everything from how the employee behaves on social media to the compensation they will receive and the expectations for their performance.

Oftentimes, those in highly compensated positions, such as engineers, executives and managers, also negotiate arrangements for severance pay when they leave an organization. In this way, a worker can receive certain pay and benefits after a layoff or termination. But, workers and companies may have a different view on the circumstances at the time that someone leaves their employment, and this disagreement – which can affect the viability of severance expectations – can potentially lead to litigation.

Workers may misunderstand their rights

Some workers may develop an unreasonable sense of entitlement when it comes to severance pay. Even when there are clear terms outlined in their contract with the company that would diminish or eliminate their severance package, they may still try to claim that they should receive the full severance pay that they negotiated before signing their employment contract. Despite losing their job for cause or failing to meet key performance metrics, they may still demand severance pay.

Particularly when the worker is not the one to initiate the separation, they may feel concerned about their future and may believe that their severance pay is the only thing ensuring their financial stability while they look for new employment. Workers may try to claim that their termination was wrongful or that the company’s refusal to pay the full severance amount is a violation of their contract. Businesses, therefore, need to both include very specific terms in contracts that discuss severance pay and very carefully document the circumstances that led to a worker’s termination and theoretically justified denying them severance pay.

Settling can be a viable solution

Even in a situation where the company is well within its contractual rights to deny severance pay, a lawsuit on the matter could be both expensive and a source of bad brand publicity. Some organizations do choose to settle severance disputes by making concessions to recently terminated workers to keep the matter out of court.

Reviewing a contract is crucial when a company must make decisions about an employee who has severance pay expectations. Seeking legal guidance if concerns arise is an important proactive step that should also be taken to better ensure that everyone’s rights and interests are protected moving forward.