Issue: Severance agreements that deny severance payments to employees fired "for cause."
Risk: Failing to clarify "for cause" could result in having to pay severance to people fired for blatant misconduct.
Action: If you include such words in employment contracts, clarify the meaning.
Many employers offer severance packages to soften the blow ofand to buy insurance against lawsuits. But pay special attention to such agreements that deny severance payments to employees who are fired "for cause."
Define that phrase in the agreement with specific examples of exactly what would prompt denial of the severance benefit, such as unsatisfactory performance, misconduct or loss of competitive data.
If you don't clarify this point, you'll run the risk of paying out severance to any and all employees, even those who are fired for obvious misconduct. Your language must be clear enough so that a judge can raise no question about its true meaning.
Case in point: Lynn Joy's employment contract included a severance provision entitling her to one year's base salary if she was terminated "for reasons other than cause." If she was fired "for cause," she'd receive nothing. The problem: The word "cause" wasn't defined.
When Joy was fired for failing to meet a billing requirement, her employer claimed it was "for cause" and denied her the severance pay.
She sued, alleging breach of contract. The company argued that "cause" meant unsatisfactory performance. A federal appeals court sent the case to trial, saying the precise meaning of the "for cause" phrase can't be determined just from reading the contract. (Joy v. Hay Group Inc., No. 04-2114, 7th Cir., 2005)
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