Using Severance Agreements Strategically: Avoid Paying Too Much Too Soon

Severance agreements can be a valuable tool for employers. When drafted properly, they give employees financial support during a transition and provide employers with legal protections, usually in the form of a release of claims. But employers sometimes make costly mistakes when deciding how much severance to offer.

One of the biggest pitfalls is offering too much money up front out of fear that the employee may file a lawsuit. While it may feel safer to “pay more and make it go away,” this approach can actually backfire. A large offer can tip the employee off that the company is worried about potential legal exposure. That perception often pushes employees to consult an attorney, who may advise them that they have leverage to negotiate for significantly more—or worse, to consider pursuing claims in court.

I once advised a client with an employee who went out on pregnancy leave, and while the employee was out, they discovered extensive fraudulent conduct she had engaged in for quite some time. When she returned, they made the decision to terminate her employment. Recognizing that the optics of firing someone who had just returned from maternity leave could be problematic, the company offered her a very generous severance package—against my advice.

I had recommended no more than one month’s pay, to avoid sending the message that the company was panicked about a potential legal claim. The employee immediately retained counsel, who demanded a much larger settlement. When the company refused, the employee filed a lawsuit, and the case ultimately settled for an amount far greater than even the original hefty severance package that was offered.

A smarter approach is to use severance agreements strategically:

• Start with a modest yet reasonable offer in light of the employee’s tenure, position, and circumstances of separation. This signals fairness without suggesting panic.
• Build in flexibility. If the employee pushes back, you’ll have room to increase the offer incrementally while still keeping the total payout within a range you’re comfortable with.
• Stay consistent with internal practices. Offering a wildly inflated package compared to what others have received can create precedent problems and employee-relations issues down the line.
• Don’t forget the non-monetary terms. Confidentiality, non-disparagement, and cooperation clauses often provide as much long-term value to the company as the payment itself.

In short, severance agreements are not just about cutting a check. They’re about balancing risk, fairness, and business strategy. By avoiding the temptation to overpay at the outset, employers preserve both leverage and flexibility, while still treating departing employees with respect.