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Severance payments dragged into the spotlight

Severance packages and separation agreements recently entered the spotlight thanks to a slate of proposed legislation. It is not uncommon to see these tools put to use as businesses and professionals part ways. However, their use in the public sector can bring up concerns they may not raise in the private sector.

As ABC reported, members of Michigan’s House recently argued about the use of separation payments and the lack of transparency surrounding them. Republicans focused largely on the $155,000 payout made to the former Department of Health and Human Services director. Democrats noted that Republicans had helped authorize more than $600,000 in secret severance payouts over the past decade.

How do private and public severance packages differ?

Businesses must compete for top talent, so the best and brightest individuals in their fields often negotiate severance packages into their contracts. Sometimes they negotiate their severance packages at a later point. As Forbes notes, many of these packages address similar concerns, including:

  • Severance pay
  • Benefits
  • Non-compete agreements
  • Stocks and options
  • Future dispute resolution
  • Releases of liability
  • Legal fees
  • Non-disclosure agreements

Some companies may offer standardized severance packages. However, companies can just as easily tailor them to the talent they are trying to entice or mollify. They should also be crafted to follow all applicable state laws. For instance, non-compete agreements often carry different weight in different states. Michigan focuses largely on how reasonable a non-compete may be. California is notorious for invalidating most non-competes.

Severance packages may work similarly in the public sector, but the matter of privacy is a key difference. The uses of non-disclosures and other terms of privacy are common in the private sector. Businesses have a vested interest in keeping their business interests private. Public agencies and public agreements, however, may come under fire for their secrecy. This is largely where the House has focused its transparency concerns.

Michigan’s public agencies and employees are frequently subject to Freedom of Information Act requests. Attorney Jay A. Schwartz noted that while the language and legality of public sector severance agreements may look like those in the private sector, the policy concerns change. Public severance agreements “are effectively using taxpayer dollars to pay the person to go away.” The public has a different interest in these agreements than in private sector deals. Schwartz asks, “Should we have some government employee not be free to talk about their experiences in government or why they left?”

The different interests at stake in a severance package

Every severance package involves multiple stakeholders. At the least, you have the employee and employer, but the terms of a severance package could easily affect future employers, legal teams, outplacement services and other employees. And, in the case of public officials, the public may also hold an interest.

The recent transparency legislation, and its focus on severance agreements, in some way recalls the old saying about pleasing some of the people all of the time and all of the people some of the time, but failing to please all the people all the time. Severance agreements will never please everyone all the time. But that is not what matters. What matters is that they offer reasonable closure and follow the law well enough to remain enforceable.