Craft severance agreements carefully, with these factors in mind

Q         When crafting a severance agreement, should you follow the guidelines of the state the employee resides/works in or the state where the company is incorporated?

Before addressing the specific question about which state’s laws would apply for the enforcement or consideration of a severance agreement, let’s address the importance of such agreements in the first place. Certainty is vital in all business operations, and discharging employees is no exception.

When you are discharging an employee from your company, it may be beneficial in many instances to provide a severance package. While the employee may have no potential employment law claim against your company (i.e., for discrimination or otherwise), providing a severance package can give you certainty they are foreclosed from filing any action.

To that end, the severance agreement should contain a general release of claims in exchange for the employee’s receiving compensation. Note, most departing employees are not entitled to any severance at all, so providing compensation in exchange for a general release of claims is an important step for the certainty you’re seeking. There are also federal, state, and potentially local provisions you should incorporate depending on your location, the employee’s location, and the employee’s age.