See also ‘Compromise Agreement’ and ‘Settlement Agreement’ – A severance agreement is an agreement whereby an employer offers an employee a sum of money in order to resolve some outstanding issue and terminate the employment relationship and the employee in return vouches that they will not take any claims against that employer. Essentially, a severance agreement may arise in two guises:

  • The first one involves the termination of an employee’s contract of employment on the basis that the employer will pay the employee a settlement fee and the employee in return vouches that he will not take any claims against the employer
  • Secondly, severance agreements may be agreed upon where the employee has already taken a claim against the employer and a severance agreement is reached whereby a settlement fee is paid in full and final settlement of any claims the employee has taken or may take in future

These agreements are, therefore, mutually beneficial in that the employer may terminate the contract of employment and avoid litigation and its associated costs (such as negative publicity) and the employee can avail of a settlement payment made out in a tax efficient manner with the lack of litigation permitting them to get on with their careers with minimal stress.