Severance, Separation, and Settlements: What Business Owners Should Plan for in Advance

Letting people go is never easy.

However, how you manage an employee departure can save you hundreds of thousands of dollars or cost you a significant amount in legal fees. This covers severance packages, separation agreements and settlements for claims like unpaid overtime.

Here’s the problem:

Many business owners don’t think about this until…something shows up on their desk. And then it’s too late.

Let’s jump in!

Here’s what’s inside:

• Why Planning Ahead Saves You Money
• Severance Packages: What Smart Owners Offer
• Separation Agreements: The Paperwork That Protects You
• Settlements: Handling Unpaid Overtime And Wage Claims
• Common Mistakes To Avoid

Why Planning Ahead Saves You Money

Most business owners are great at planning for growth.

Few prepare themselves for the opposite eventuality. Every company will have to say goodbye to employees. Whether layoff, firing or silent resignation… the departure is just as important as the recruitment.

When you don’t have a plan, three things tend to happen:

1. You panic and overpay just to make the problem go away
2. You skip steps and leave yourself open to a lawsuit
3. You burn the relationship and damage your reputation

Having a clearly defined plan (written before you need it) helps you stay in control. It guides you on what you’re offering, what you’ll ask in return and what to do if the employee objects. Not sure how to start? A qualified employment law attorney in Los Angeles can help you develop a template — particularly with sticky issues like final paychecks, accrued vacation and unpaid overtime due at termination.

Things like that are worth their weight in gold when you need them.

Severance Packages: What Smart Owners Offer

A severance package consists of pay and benefits you provide to a departing employee.

It’s not legally required in most situations. So why does nearly every smart business owner provide one anyway?

Severance provides an incentive for the employee to sign a release.

A release protects your business.

Here’s why severance is worth the cost:

• It lowers the chance of being sued
• It protects your company’s reputation
• It helps remaining staff feel safer in their jobs
• It buys you a signed agreement (more on that below)

But how much is enough? Well, times have changed. A new benchmarking report found that average severance rose to 19.3 weeks among all industries. That’s a 24% increase year-over-year.

That doesn’t mean you have to give them that much. Small companies just don’t have that luxury. Only 25% of companies in the US provide severance to all employees anyhow.

A common formula that works for most small and mid-sized businesses is:

• 1 to 2 weeks of pay for each year of service
• Plus continued health coverage for 1 to 3 months
• Plus a payout for any unused vacation

Simple. Consistent. Documented. And before you need it.

Separation Agreements: The Paperwork That Protects You

Here’s where most business owners drop the ball.

They give an employee a severance check… but never receive a signed severance agreement in return. Big mistake.

A separation agreement is a CONTRACT. When an employee signs a separation agreement they are agreeing not to sue you in exchange for your severance payment. If you don’t get one, you’re just sending them a cheque and wishing for good luck.

A solid separation agreement should include-

1. A clear release of all claims (including wage and hour claims)
2. A non-disparagement clause
3. A confidentiality clause about the agreement itself
4. Return of company property
5. A clear final payment date

It also gives the employee time to review the document. Many states require advance notice in writing. Federal law allows employees over age 40 a full 21 days to review the agreement, and even 7 days to revoke it after signing.

(That keep it simple motto in action again.)

Do not copy and paste from a google search template. Every word matters more than you would expect. Miss one line and a court could dismiss the entire release.

Settlements: Handling Unpaid Overtime And Wage Claims

This is where things get expensive fast.

Failure to pay overtime is one of the number one reasons why employers find themselves in court. Often times, the employer was unaware they were violating the law.

Common unpaid overtime mistakes include:

• Misclassifying staff as “exempt” when they aren’t
• Treating employees as independent contractors when they shouldn’t be
• Letting people work through lunch without pay
• Not counting time spent on emails or calls after hours

Take a look at these statistics. Employees in California lost more than $2 billion dollars to unpaid wages and overtime in a single year.

And recall… willful violations may entitle the employee to recover DOUBLE liquidated damages plus the attorney fees of the employee.

Here’s how to handle a claim the smart way:

Step 1: Don’t bury your head in the sand. The majority of claims never improve by simply hoping they will go away.

Step 2: Rush Tax Audit. Learn precisely how much ($$$ if any) you owe.

Step 3: Make a reasonable offer quickly. Settling for backpay plus a little extra will always cost less than litigation.

Step 4: Properly execute the settlement. If you do not have the employee sign proper documentation, they can turn around and sue you.

Sounds heavy, right? It is. That’s why prevention is always cheaper than the cure.

Common Mistakes To Avoid

Quick recap of the slip-ups business owners make over and over:

• Paying severance without a signed release
• Using a copy-paste agreement off the internet
• Misclassifying workers and ignoring unpaid overtime risk
• Skipping the final paycheck rules in their state
• Trying to negotiate settlements without legal help

Any one of these can turn a quiet exit into a very loud lawsuit.

Bringing It All Together

Severance, separations and settlements are never enjoyable topics. However they are a natural part of business.

Owners who think ahead nearly always come out ok. Owners who wait until they receive the lawyer’s letter…. usually don’t.

To quickly recap:

• Build a simple severance policy and put it in writing
• Always pair severance with a proper signed separation agreement
• Take unpaid overtime seriously — audit your payroll before a claim is filed
• Get real legal help for anything beyond a basic exit

This isn’t sexy stuff. However, it can mean the difference between an exit that preserves value for your business and one that winds up in litigation.

Plan it once. Use it for years.