Severance as a Risk-Management Tool, Not a Parting Gift

A defensible termination is not the same as a cheap one. Employers routinely assume that a well-supported decision carries no litigation risk, and that assumption is getting more expensive.

Several things have shifted. Courts increasingly weigh the totality of the evidence rather than applying traditional frameworks rigidly. State law keeps expanding, particularly around wage payment and separation requirements. Plaintiffs' attorneys have become more selective and more strategic. The result is that an employer can hold strong defenses and still face a high probability of being sued. Suspected abuse of protected leave is the classic example: act on an honest, well-documented belief and you will likely win, but you will also likely be challenged regardless of the merits.

Expert comment from Daniel R. Levine, Esquire:

A termination decision can be entirely lawful—and still result in an expensive lawsuit. That is why employers should think about severance not simply as a benefit or gesture of goodwill, but as a strategic risk-management tool.

The key question is not always whether the employer can successfully defend the termination. It is also whether the employee is likely to challenge it and what that challenge will cost. Even a strong case may require responding to an agency charge, participating in mediation, conducting discovery, and potentially litigating through summary judgment or trial. In the right circumstances, a reasonable severance payment in exchange for a properly drafted release may be far less expensive—and far less disruptive.

That does not mean severance should be automatic. The employer should evaluate the particular risk factors: protected activity, leave or disability issues, inconsistent documentation, deviations from past practice, the manner in which the termination was handled, and the employee’s apparent likelihood of pursuing a claim. Just as importantly, amounts already owed to the employee—such as wages, commissions, or other required final pay—should never be confused with severance consideration.

The practical takeaway: a defensible termination is not necessarily a cost-effective termination to litigate. Sometimes the best business decision is to pay for certainty, obtain a release, and move on.

Cost versus risk, not right versus wrong

Asking whether you have a strong case is reasonable but incomplete. Ask instead whether the decision is likely to be contested and what defending it will cost. Even a straightforward claim can mean an EEOC or state agency charge, mediation, discovery, and pretrial motions. Weighed against a reasonable severance figure, the arithmetic often changes.

Risk rises where protected activity has occurred, where complaints or internal reports could support a retaliation claim, and where FMLA, ADA or analogous state protections are in play. Inconsistent documentation, departures from past practice, and an employee likely to litigate regardless all point the same direction. Severance matters less for clearly voluntary resignations, well-documented policy violations, serious misconduct, or short-tenure employees with limited damages. Use it selectively, not by default.

Execution creates its own exposure

Employers concentrate on the decision and underestimate the risk created by how it is carried out. Rushed terminations, inconsistency with past practice, poor communication, bad timing, payroll left uncoordinated, or a separation handled in a way that humiliates the employee all add exposure. Highly visible exits and uneven security procedures breed the resentment that turns into claims.

The most consequential process error is blurring final pay with severance. Final pay is a legal obligation: wages, overtime, and depending on the state, accrued PTO and earned bonuses or commissions. Severance is discretionary, new consideration given in exchange for a release. Never conflate the two, and never condition final wages on signing a release. That alone can generate separate liability.

Setting the number

There is no formula. The useful question is what amount has a realistic chance of resolving the risk. Consider how a plaintiff's attorney will read the offer: a good one, a neutral "your call," or an invitation to do better in litigation. The goal is to stay out of that third category, adjusted for tenure, role, and exposure.

Re-examine the underlying decision before extending anything. The offer may be declined, leaving you to defend it, and the employee's counsel will weigh those same facts when advising whether to accept or sue.

Severance works best inside a broader risk-management approach, not as an administrative afterthought. Employers handling difficult separations, especially across multiple states, should ask not only whether a decision is defensible but whether early resolution is the better outcome.

For a detailed look at when and how employers can use severance to reduce litigation risk, see “When Termination Becomes a Litigation Risk: Using Severance Strategically,” JD Supra: https://www.jdsupra.com/legalnews/when-termination-becomes-a-litigation-2655039/