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3 times employers can refuse to uphold a severance agreement

On Behalf of | Apr 18, 2024 | Employee Rights

Severance pay is not an automatic right for workers in Michigan. Employees, especially well-compensated white-collar professionals, often negotiate severance agreements when they first accept a new position with a business. That way, if they unexpectedly lose their job, they can theoretically reduce the economic strain losing their job causes for their household.

Severance packages may include a lump-sum payment or access to workplace benefits after a job ends. Sadly, not everyone with a severance agreement included in an employment contract receives what they negotiated for when they first accepted the job. Many employers try to reduce or eliminate severance pay at the end of an employment arrangement. The three scenarios below might actually justify an employer’s refusal to uphold a severance agreement.

Voluntary termination

Maybe the company announced mass layoffs and allowed workers the option of volunteering. Perhaps the employee has decided to pursue early retirement or take a job elsewhere. Most severance agreements include provisions that eliminate severance compensation and post-employment insurance coverage if the worker voluntarily leaves their position instead of facing an involuntary termination.

Termination for cause

Employers typically include provisions in severance agreements that allow them to deny compensation to people fired for certain reasons. Terminations related to misconduct or poor performance often result in a worker being ineligible for severance packages or only able to receive a fraction of the negotiated severance pay.

Terminations due to business failure

Sometimes, a worker loses their job not due to targeted termination but rather mass staff reductions or a business closure. When a company becomes insolvent, it may be necessary to terminate workers and reorganize certain financial obligations. Unfortunately, a company dissolving or filing for bankruptcy might potentially be unable to fulfill financial obligations to employees. While the company may technically still have an obligation to pay severance in accordance with an agreement, the claim of the employee entitled to that severance compensation could fall well below other creditor claims.

In many other circumstances, the refusal to pay severance as agreed upon in an employment contract could lead to employment litigation. Recognizing when companies may have a justification for failing to uphold a severance agreement could benefit workers frustrated by their circumstances.