Severance Agreement Review and Negotiation FAQs


 

What Is a Severance Agreement?

A severance agreement is a contract between the employer and the executive. The employer promises to give the executive certain benefits. These may include money (in forms such as a lump sum payment, salary continuation or payment of continued healthcare (COBRA) premiums), outplacement services and a good letter of reference. In exchange, the executive gives the employer a release of any legal claims the executive may have, including claims for disputed wages or bonuses, wrongful discharge and discrimination. For a severance agreement to be enforceable, the employer must give the executive something more than what he/she is already due. It is not sufficient, for example, for an employer to seek a release from an executive in exchange for wages, salaries, commissions, bonuses and vacation pay that the executive has already earned or accrued.

Does the Law Require Severance Pay?

Unless the payment of severance compensation is part of an existing Employee Benefit Plan, there are no federal or state law requirements that employers pay terminated employees severance.

What if My Company Has an Employee Benefit Plan, but I Do Not Know If  Provides for Severance?

An employee Benefit Plan is like an insurance policy, often times, the document contains legalese that can be hard to understand.  While the Employer or Plan Administrator is required to notify qualified employees upon termination of severance benefits, sometimes through an oversight or by lack of care this does not happen.  Employees are entitled to request and obtain a copy of a summary of the Employee Benefit Plan, but it may take an attorney to truly understand whether a terminated employee is entitled to a severance benefit.

I Know That My Company Has Paid Severance, Does That Mean I Will Get a Severance Payment?

Whether or not a particular employee will be offered severance often depends upon the "Corporate Culture" of the firm.  As a general rule, highly positioned employees are more likely to be offered a severance agreement than middle or lower level employees.  When a company is concerned about potential liability to a terminated employee, it will offer a severance agreement in order to obtain a complete release of all legal claims.  If you have been terminated and the question of severance was not mentioned at the time of your termination, it is likely that you will not receive a severance payment without the assistance of a qualified employment lawyer.  After the lawyer has reviewed the circumstances of your employment and termination, he should be able to tell you whether severance negotiations would likely result in the payment of compensation.

What Kind of an Executive Is Usually Offered a Severance Agreement?

An executive who is getting some kind of "extra" benefit or payment from the employer.

Most employers aren't stupid. They don't want to provide severance benefits only to have the executive turn around and sue. So, if an executive is given more than he/she has a legal right to, the prudent employer seeks a waiver of claims in exchange.

Among the kinds of executives who receive severance agreements are these: (1) the executive who has served the employer well, but who is being exited with a separation package due to some form of reorganization; and (2) the executive who scares the employer, because he/she may have legitimate workplace claims and the employer has concluded that "buying-off" the executive is the smart thing to do.

What Kind of Severance Is Typical?

There simply is no "typical" severance.

A large number of factors affect what the executive is offered. These include employer size, industry, employer's economic health, employer's past practices, and the region of the country where the employer is located.

There are a number of conventions as to how much severance is appropriate. None of them necessarily mean anything. Some employers think that a week of severance for every year of service is "standard." Some executives believe they are worth at least one month of severance pay for every year worked. An old rule of thumb, that occasionally receives some attention, is the notion that for every $10,000 in salary sought, it will take one month to find a job. On that, some executives argue that they should be paid severance that will cover them for the entire period during which they are likely to be looking for a job.

What Do Employers Usually Pay in Severance?

It is said that severance is equal to one week of pay per year of service to mid-level executives, and up to a month per year of service to top executives.  Hourly employees are rarely offered severance.  That being said, employees who earn six figure annual compensation are usually offered a severance that includes several months of pay and a continuation of insurance benefits for the same period.

If I Am Not Offered a Severance Agreement, How Do I Get One?

Perhaps the greatest mistake that executives make when they negotiate the terms of employment is the failure to negotiate the conditions on which they will be exited (see Just got hired? Plan on getting fired!).

In today's business world, when senior executives regularly move into and out of positions within 18 months to 3 years, it is critical to plan your exit at the time you enter employment.

If you do not have a written agreement that provides for severance as you exit, you need to assess your leverage and then use it to get a severance package. Your leverage may consist of anything from a whistle-blower claim against the employer to an argument that fairness dictates that you walk with a severance package.

I Am Thinking about Signing a Severance Agreement.  What Should I Do?

A severance agreement is a binding legal document in which an employee is not only giving up valuable legal rights, but also, agreeing to terms which may impact upon future employment in a negative way.  You should always have the severance agreement reviewed by a qualified attorney before signing.   Employers who offer severance normally except employees to retain an attorney who will represent the employee in negotiations over the terms of the severance agreement. Often times the attorney will suggest ways in which the agreement can be modified that will be acceptable to the employer, so as to make the agreement fairer to the employee.

Should an Attorney Review My Severance Agreement?

Absolutely.

In a severance agreement, you will give up, or modify, some of your rights. Before you do, be sure you know what those rights are.

  1. Only an attorney has the training and experience to advise you on contractual rights that you may have because of an employment agreement, a stock option plan or a bonus program
  2. Only an attorney can advise you whether an employer has violated your civil rights or the discrimination, whistle-blower, wrongful discharge, wage or workplace safety laws that protect you, and
  3. Only an attorney can advise you whether the severance agreement you have received is drawn according to applicable local, state and federal laws, to be sure that you receive all of the notices and benefits those laws require.

Your fellow executive, the HR guy next door, and Uncle Jim who went to law school for a year, may look over your severance agreement and give you some ideas. The reality, however, is that the best, most reliable and most complete advice will come from an experienced executive law attorney.

How Do I Know If My Severance Agreement Is Appropriate?

To determine whether your employer's severance agreement is "legally" appropriate, you need the answers to two questions: first, does the agreement comply with the controlling state and federal law?; and, second, does it properly take into account the provisions of your employment agreement, stock option plan, bonus program or other contract between you and your employer? Only a lawyer skilled and experienced in employment, corporate, securities and/or tax law is qualified to make that evaluation.

Another measure of "appropriateness" is whether you believe the deal is "fair" in light of all of the circumstances. If it is not, you need to work to improve the financial and other terms of the agreement (see the next question and answer).

How Do I Improve the Terms of My Severance Agreement?

Recognize, at the outset, that most employers anticipate negotiating with you over the severance package. If you have been offered three months severance, the employer may be prepared to pay you five or six months. You need to ask your employer for more in a way that seems likely to result in your picking up all of the dollars that are on the table.

Improving your severance package involves correctly assessing your leverage, figuring out who to "pitch" with your request, deciding who should tell your story (you, your attorney, a sympathetic officer or director), and determining to whom the pitch should be made, and how (in person, by a letter from you, by a letter from your attorney). Don't underestimate the good that may come in negotiations from letting the employer know, at the right time, that you have sought the advice of an attorney.

Also, you need to consider what kinds of things to ask for in light of your personal circumstances and the employer's history of providing separation agreements. The list of additional items you request may range from the obvious (more severance pay) to the more creative (transferring to you ownership of the laptop computer you have been using).

Why Does My Severance Agreement Provide That I Have 21 Days to Consider the Employer's Offer and 7 Days to Revoke?

Because you are "old."

Back in 1989, Congress decided that individuals who are 40 years of age and older need extra protections when their employers offer severance agreements. The Older Workers Benefit Protection Act provides that if an employer wants to obtain a valid age discrimination release, under federal law, the release you give the employer in a severance document must be "knowing and voluntary." In order to meet that standard, an employer must give you 21 days to consider its offer. You can waive any part of this period by simply signing the severance agreement.

And, since you are "old", the employer must also provide you the opportunity to reconsider and revoke your acceptance of the agreement. The 7-day revocation period is NOT waivable by either you or your employer. Your severance agreement is probably structured so that you receive no benefit or payment until after the revocation period has run and the employer is sure that you can no longer change your mind.

Your employer is also required to advise you, in writing, that you have the right to consult with a lawyer before signing the proposed release. (Congress apparently felt that in light of your age, the idea of seeing an attorney would not have occurred to you.)

In some circumstances, a separation agreement will provide that the employee has 45 days for consideration. This may occur, for example, if you are part of a group that is offered an exit incentive or if you are within a class of employees selected for an employment termination program. In those situations, the employer is also legally required, if it wants a valid federal age discrimination release, to provide you with the ages of your fellow employees who are, and who are not, eligible for the exit incentive or selected for the job elimination program. That requirement is designed to give you information by which you (and your lawyer) can determine whether you may be a victim of age discrimination.

I Am Owed Earned but Unpaid Bonus Compensation from Two Years Ago, If I Sign the Agreement Will it Still Be Paid?

One of the troubling issues that sometimes arises with severance agreements is the question of how they may impact compensation that has already been earned or accrued, but not paid.  Because severance agreements nearly always contain a legal release of claims, it is possible that an employee who is owed previously earned compensation prior to signing the agreement may lose any right to the compensation.  When there is a question of previously earned, but unpaid compensation, it is essential that an attorney carefully review all aspect of the situation and agreement before the agreement is signed.

What If the Severance Agreement Makes Me Promise Not to Use or Disclose Confidential Information, and Says I Can Be Sued If I Do?

It is common for severance agreements to contain confidential information and trade secret clauses that establish legal liability for an employee who uses or discloses secret information obtained during the employment.  In the technology fields, these clauses are now standard.  This type of clause can lead to lawsuits against employees who are later employed by a competitor, or who go on to start their own company.  This type of situation must be reviewed on a case by case basis by a qualified employment attorney before the severance agreement is signed.

What Do I Do If I Believe That I Am Not Being Treated Fairly?

Say just that.

Tell your boss, the human resources professional, your boss's boss, or whoever else can help change the situation, that your exit is not being handled properly.

If you are not able to turn things around on your own, or if you just need help assessing your situation, consider engaging an executive law attorney to advise you. Often, with just an hour or so of consultation, an experienced executive law attorney can help you evaluate your rights under the law and under any contracts with your employer. An executive law attorney can also assist you in identifying options and planning a strategic course to turn around the situation. Although other approaches should typically be exhausted first, it may be that only initiating litigation against your employer or former employer will bring an acceptable resolution.

I Was Discriminated Against and Wrongfully Terminated.  Can I Sign a Severance Agreement and Still Sue My Employer?

In virtually all cases, severance agreements contain a release of all claims.  So long as your signature is not obtained by fraud, the agreement will be binding and preclude you from suing for wrongful termination.  Most severance agreements expressly state that the employee has consulted a lawyer prior to signing the agreement, so the chances that the release will not be binding is very low.  For this reason, if you believe that you have a legal claim against your employer for wrongful termination, harassment or discrimination, it is very important that you fully discuss the situation with a qualified employment lawyer before you sign a severance agreement.

I Am Concerned That My Employer Will Give Me a Bad Reference in the Future, Is There Anything I Can Do to Prevent That?

Severance agreements can contain both monetary and non-monetary terms.  One provision that can be included is a non-disparagement clause, which states that neither the employer or the employee will make negative comments about the other.  It is also possible to have the agreement require that a letter of recommendation be signed by an executive of the company, for use by the employee in seeking later employment.  The question of employment references is an important issue that a qualified employment attorney may be able to negotiate into the agreement, to prevent negative fallout from the prior employment on future prospects.

Just Got Hired? Plan on Getting Fired!

For most executives, the days of a 30-year career with one company are as far gone as the slide rule. Most executives will transition in and out of multiple employment situations in the course of their working lives.

It only makes sense, for both the employer and the executive, to pre-plan for the executive's exit. Every pre-employment agreement should provide the terms under which the executive will separate, whether termination is for cause, without cause, by virtue of a disability, upon a change of control, or at the end of a fixed term of employment.

Employer and executive should also address, in writing, how voluntary resignations will be handled. The circumstances under which the executive can resign for good reason and receive a severance package (if required to report to an office more than fifty miles from Anytown, U.S.A.) should also be defined.

If It's Not Required, Why Do Companies Offer Severance Pay?

Even though there is no law that requires a company to pay severance, many companies do pay severance for these reasons:

    Avoid Disruptions Caused by Departing Employees.  If an employee who is leaving is paid severance, the employee is more likely to be helpful and cooperative, and have a better attitude, while duties are completed or shifted to other employees.  This avoids workplace disruption and keeps things on track for the company.

    Fairness and Goodwill.  For the same reasons that the saying "Don't Burn Your Bridges" exists, companies who terminate employees for reasons other than misconduct understand that fairness requires sometime of financial support for a limited period of time, since the terminated employee presumably will suffer a financial loss due to the termination.  Further, a terminated employee who has received a fair severance package is less likely to express negative opinions regarding the company, and this protects the goodwill of the firm.

    Seniority (Years of Service).  It is customary to reward employees who have provided a significant number of years of service to the company with severance benefits.   The longer the period of employment, the larger the benefit package.

    Highly Placed Executives Are Nearly Always Paid Severance.  It is generally the rule in the corporate culture to pay highly placed executives severance.  In fact, it can be assumed that the company officers who make the decisions on whether to pay severance to another officer who is leaving the firm will keep in mind that they too someday may be in a similar position.  For this reason, highly placed executives nearly always obtain the largest severance packages of all employees.

    Release of Claims.  Probably the single most common reason for a company to pay severance is to obtain the departing employees signature on a release of claims.  In fact, whatever the reason for the decision to pay severance, the actual payment of the benefit is nearly always conditioned on the signing by the employee of a release of all claims against the company.  This is because companies know that the cost of defending a legal claim brought by a terminated employee can be very substantial, regardless of whether or not the employee has a valid grievance or not.  If the employee actually has a valid legal claim against the company, the severance will usually be greater by way of compensation for the claim.

If you have questions regarding Severance Benefits, please feel free to give us a call at 1-800-306-6010 or contact us online.

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