Review severance pact for clarity; define ‘for cause’ terminations

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in Employment Law,Firing,Human Resources

Many employers offer severance to soften the blow of terminations and to buy a little insurance against lawsuits. But for those agreements to be enforceable, it's important that you define the "fine print."

Pay special attention to agreements that deny severance payments to employees if they're 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 blatant misconduct. Your language must be clear enough so that a judge can raise no question about its true meaning.

Recent case: Consultant 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 in the contract.

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 along to trial, saying the precise meaning of the "for cause" phrase cannot be determined just from reading the contract. (Joy v. Hay Group Inc., No. 04-2114, 7th Cir., 2005) The court found it ironic that the company is in the business of consulting on executive-compensation plans.

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