Severance Agreement Review and Negotiation FAQs


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 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.

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.

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.

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.

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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