When Termination Becomes a Litigation Risk: Using Severance Strategically
Rather than treating it as routine or a gesture of goodwill (although it is), employers should view severance as a strategic tool to manage risk and control costs.
What's a severance agreement, and why does it matter for employers?
A severance agreement is a legally binding agreement in which an employer provides compensation or benefits in exchange for a release of claims and other separation terms. Severance is generally voluntary and is best understood not as an admission of wrongdoing, but as a strategic tool for managing litigation risk and separation-related costs.
Why even "good" termination decisions can lead to legal disputes
Many employers are finding that decisions they would have confidently defended in the past are now more likely to be challenged.
Several factors are contributing to this shift. Courts are increasingly emphasizing the totality of the evidence rather than relying rigidly on traditional frameworks.
Even relatively straightforward claims can involve responding to a charge filed with the U.S. Equal Employment Opportunity Commission or other government agency, participating in mediation, managing discovery, and preparing motions or for trial.
When it makes sense to consider severance
Severance is not necessary (or even recommended) in every situation, but there are certain indicators that should prompt a closer look.
Other considerations weighing in favor of severance include inconsistent documentation, deviations from past practice, or whether the employee appears likely to pursue a claim regardless of the strength of the employer's position.
How "execution” can increase litigation risk
One common employer mistake is focusing entirely on the termination decision while underestimating the litigation risk created by the process.
Even a well-reasoned decision can become more difficult to defend if the process is handled poorly.
Keep final pay and severance separate
Final pay obligations are governed by law and typically include wages, overtime, and, depending on the state, accrued paid time off, and earned bonuses or commissions.
Severance, by contrast, is discretionary. It is a new consideration offered in exchange for a release of claims and other separation terms. Employers should therefore be careful not to blur the line between wages that are already owed, and severance that is being offered as part of a negotiated separation.
Determining the amount of severance
There is no universal formula for determining severance.
What employers should do before offering severance
Before extending a severance offer, employers should take a step back and evaluate the underlying decision.
How employers can use severance to reduce litigation risk
Ultimately, severance is most effective when approached as part of a broader risk-management strategy rather than as a routine administrative step at the end of employment.
This document is designed for general information only. The information presented in this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client.
For further information please contact me at www.kmckernanlaw.com kevin@kmckernan.com or 718-317-5007.