How Does an Employee Buyout Work?

An employee buyout, just like the name implies, works by offering an employee something in return for leaving the job -- often a generous retirement or severance package. If your company is downsizing or shifting focus, you might need to let good employees go. Offering them a buyout is one way to thank them for their service and cushion the blow.

Buyouts are usually reserved for employees who are terminated not for cause. For example, you might offer an employee the opportunity to retire early or issue buyout packages to employees who are laid off. Sometimes, employee or union contracts require that employees who are terminated for cause must receive buyout packages. The law doesn't require you to offer any employee a buyout; you only have to supply a buyout package if an employee's contract mandates it.

You have broad discretion with what to offer your employee in a buyout package. You can even place conditions on the buyout so long as those conditions don't violate the law. For example, you might require that an employee keep company secrets to get the buyout package, and the employee will be required to do so unless subpoenaed, or unless company secrets cover up legal wrongdoing. Employers frequently offer employees severance pay, continuing health insurance, or a pension as part of a buyout package.

If you issue an employee a buyout package, you'll need to outline its specific terms in a contract. After both parties sign the contract, the contract has the force of law, which means that both you and your employee can sue to enforce the contract. For example, if you agree to pay your employee a year of severance pay and then back out of this promise, the employee could sue you for the pay as well as for court costs and attorney's fees.

An employee is under no obligation to take a buyout package. If, for example, you offer an employee who does not wish to retire early retirement, the employee can turn down the offer. If you then terminate the employee, you could be accused of age discrimination, so it's important to clearly document your reason for termination and ensure that it complies with your employee's contract and the law.