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The role of severance pay in an employment contract

When a company in Houston, Texas is offering an executive compensation package, severance is one aspect that is often included. It is not required, and according to the Texas Workforce Commission, severance pay is only enforceable when it is part of a written wage agreement. Earned wages, vacation time and sick leave do not count as severance pay because they are part of what the employee has already earned.

A severance package is often added to the executive compensation contract so that the prospective employee will feel more comfortable signing a noncompete agreement. The employee promises not to use or share company trade secrets for a pre-determined amount of time after leaving, and in return the business continues to provide a salary and benefits so the person does not suffer hardship while seeking employment that does not violate the noncompete.

Another function of a severance package is to prevent the employee from litigation based on perceived discrimination. The U.S. Equal Employment Opportunity Commission states that employees may be required to sign a waiver that will protect the company from retaliatory lawsuits. Severance pay acts as a settlement of the company’s liability and a statement that there were no laws, statutes, regulations or policies violated in the termination of the employee.

Rather than naming a dollar amount, a severance package typically states how many months of salary the former employee will receive and which benefits will continue. Employees may receive legal counsel that encourages them to attempt to negotiate for a more generous settlement than has been included in the agreement. Employment law does not prevent employees from negotiating for compensation, even if severance pay was not included in the employment contracts. 

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