Employment & Labor Insider

Employers often assume that a legally defensible termination decision will not create a litigation risk. But that is not always the case.

Even well-supported employment decisions can lead to expensive disputes with unpredictable outcomes, and those disputes can be a huge distraction for managers and co-workers.

That is where severance comes in. Rather than treating it as routine or a gesture of good will (although it is), employers should view severance as a strategic tool to manage risk and control costs.

We recently discussed these issues in a webinar.  The full webinar recording is available here.

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. State employment laws continue to expand, particularly in areas like wage payment and separation requirements. Plaintiffs’ attorneys are also more strategic in the way they evaluate and pursue claims.

In some situations, employers may have exceptionally strong legal defenses while simultaneously facing a high likelihood of litigation.

For example, employers confronting suspected abuse of protected leave often have substantial defenses if they acted on an honest and well-supported belief. At the same time, those situations frequently involve employees who are very likely to challenge the decision regardless of the merits.

The result is a more unpredictable litigation environment. Even sound decisions can lead to disputes that are expensive and time-consuming to resolve.

Should employers defend a termination, or offer severance?

A common instinct is to ask whether the employer has a strong legal case. Although that is a good question, it is not always the most useful one.

A better framing is to ask whether the situation is likely to be challenged and, if so, what it will cost to defend. A defensible decision is not always cost-effective.

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 those costs of defense are weighed against a reasonable severance offer, the analysis may change.

This is not about right versus wrong. It is about cost versus risk.

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.

For example, risk tends to increase where there has been protected activity, such as complaints or internal reports that could give rise to retaliation claims. Similarly, employees with conditions or situations covered by the Family and Medical Leave Act, the Americans with Disabilities Act, or similar state laws often present more complex scenarios.

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.

On the other hand, severance may be less necessary in situations involving clearly voluntary resignations, well-documented policy violations, or serious misconduct. It also may not be advisable if the employee has short tenure and limited potential damages.

The key is not to treat severance as a default, but as a tool that is used selectively when the risk profile justifies it.

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. This can include terminations that are rushed, inconsistent with past practice,  poorly communicated, or handled in a manner that unnecessarily embarrasses the employee. Timing issues, lack of coordination with payroll, and unclear messaging during the separation process can all create unnecessary exposure. For example, highly visible separations or inconsistent security procedures can create unnecessary resentment and increase the likelihood of litigation.

Another common issue is the tendency to blur the line between wages that are owed and severance that is being offered. That distinction is critical.

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 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.

Employers should also avoid conditioning the payment of final wages on an employee’s signing a severance agreement. Doing so can create additional liability and, in some cases, lead to entirely separate claims.

Determining the amount of severance

There is no universal formula for determining severance. The better question is not simply what the employer wants to pay, but what amount has a realistic chance of resolving the risk.

From a practical standpoint, it is helpful to consider how a plaintiff’s attorney is likely to view the offer. In many cases, the reaction will effectively fall into one of three categories: a good offer, a neutral “your call,” or a belief that the employee can do better through litigation. Employers should structure severance with that reality in mind.

The goal is to avoid falling into that third category. Context matters, including the employee’s tenure, role, and potential exposure.

What employers should do before offering severance

Before extending a severance offer, employers should take a step back and evaluate the underlying decision.

This step is critical because the severance offer may not be accepted and the employer may still need to defend. In addition, the employee’s attorney will often evaluate the underlying facts when advising the employee whether to accept the offer or pursue litigation.

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.

That means focusing on risk and cost, paying close attention to execution, and understanding the legal requirements that apply to final pay and separation.

Need guidance?

Employers handling difficult separations -- particularly employers operating in  multiple states -- should evaluate not only whether a decision is defensible, but also whether an early resolution strategy is warranted.

To discuss severance strategy, separation agreements, or multi-state termination issues, contact any member of Constangy’s Employment & Labor practice group.