Understanding Severance and Release Agreements in Today’s Global Economy
Severance and release agreements have become an essential tool in managing the increasingly complex and interconnected world of business. For employers, they provide the opportunity to end the employee’s relationship with the business with a clearly defined plan of how they will proceed going forward and often with some degree of compensation for the individual. Even well known companies with large workforces, such as Apple, have had to rely upon these agreements to part with employees who have different visions for the company. When Steve Jobs was dismissed from Apple in 1985, he parted with $80 million. Once home, Jobs saw a copy of National Geographic and discovered Pixar, which he would later purchase and turn into a $7.4 billion business. Severance and release agreements are formal documents that contractually terminate the individual’s employment and exercise a release covering all claims that the individual may hold against the company at the time that the agreement is signed. Most countries in the Arab world and internationally require some form of severance during the course of employment. For example, in the UAE, severance is required under federal laws such as Federal Law No.8 of 1980 on the Regulation of Employment Relations. In Egypt, termination of the employment contract requires severance under Federal Egypt Employment Law No.12/2003. Pakistan’s Industrial Relations Ordinance 2002 has mandatory provisions regarding severance to those who have served 90 days or more.
The fact that many companies worldwide are seeking to maximise their profits and run the most profitable businesses possible has increased the demand for severance and release agreements. Leaders see these agreements as a tool to provide flexibility in their workforce and many companies consider them essential, especially when letting people go. At the same time, employees who receive compensation as part of their severance and release agreements consider them a way to be compensated for their loss of employment. As an employee signing such an agreement, you are effectively receiving a form of severance from your company.
Though these agreements are generally used to let people go, some companies will utilise them to gain an agreement from an employee to stay with the business. If your company has obtained a non-compete agreement from another company, you may be encouraged to sign a severance and release agreement. It would essentially release your old company from its former obligations as you would be joining the new company.
With the Arab world’s recent shift towards privatisation and more foreign investments (attracting Saudi Arabia’s Vision 2030 for example), employers will be keen to implement severance and release agreements into their business. Introducing these agreements reduces the risk that employees will hold employment related claims against the business after they exit.
Companies such as Microsoft, Yahoo!, and Clorox have effectively implemented severance and release agreements into their business. Yahoo! used its agreement to compensate and part ways with a chief executive who had been with the business for several years. Clorox, on the other hand, saw a recent wave of resignations, including its former CEO, and used these agreements to minimise the likelihood of lawsuits. Companies generally see these agreements as a way to appropriately end that phase of the employment relationship.
Most companies prefer to exclusively rely on severance and release agreements and avoid potential problems surrounding oral contracts. Employees on the other hand prefer to use the severance and release agreements to provide either a job reference or follow on employer as they begin a new chapter in their employment life. Severance and release agreements are quite a complex tool, as they involve employment law, general corporate law, labour law and even sometimes bankruptcy law. However they essentially include a waiver of all claims against the company including overtime pay, benefits package related items etc.
There are a few clauses that are more typical than others, sometimes these can be customised depending on the party’s requirements: As the world has shifted towards more and more integration, we should expect to see the globalisation of working hours. These changes have resulted in a shift in company culture where employers are likely to have workers around the world working at the same time. This has begun to greatly affect jobs such as human resources.
