A severance agreement is a contract that you sign with a former employer when leaving a position, which usually provides you with compensation in exchange for giving up the right to sue that employer. It is a way to bring closure for both sides.
Here are some suggestions on terms to include in a severance agreement:
- Allocate a portion of the compensation to W-2 wages and a portion to 1099 income to minimize the taxes. When allocating a portion to 1099 income, you should include language in the agreement that it is meant to compensate the employee for any emotional distress claims. Any compensation allocated toward 1099 income will still be taxed but at a lower rate than W-2 income, which is treated as wages.
- Ask for a neutral reference where the employer agrees to only disclose the dates of employment and title held, while working for the employer. It can also be helpful to delegate a specific person that prospective employers should ask to speak with, when checking a reference.
- If the original employment terms included a signing bonus or relocation compensation that was required to be repaid if the employment did not last for a particular duration of time, include language in the severance agreement that the reimbursement is waived by the employer.
- Put a timeline in the severance agreement outlining when the severance payment will be made.
- Require a mutual waiver of claims. The employer will no doubt ask for a waiver from you as the employee, giving up your right to sue the employer. You should also get a waiver from the employer to the same effect. If the employer will not agree to a mutual waiver, at a minimum, get a waiver from the employer giving up its right to sue for malicious prosecution.