Most employees or executives will at some point be faced with losing their jobs during an uncertain economy. In the event that you are terminated, you should be able to negotiate a fair severance package, especially if you already have an employment contract. The negotiating process for an employment severance agreement needs to take into consideration a number of key economic and legal issues. An employer who offers a severance package to an employee over 40 must give him or her at least 21 days to consider it and 7 days to offer him or her a revocation after he or she signs In these situations, it is often best to consult with a lawyer who is experienced with addressing these issues. Additionally, you may be able to claim additional severance pay or benefits if you have negotiating leverage or a lawsuit against the company.
During this article, I focus on 16 key issues to consider when negotiating an employment severance agreement, with a specific focus on executive severance agreements. The parties to severance agreements enter into binding contracts for the purpose of settling any disputes between them. Considering how unlikely it is that an employee will be able to prevail on all of these issues, the employee will have to pick his or her battles carefully around these
1. Severance Pay
Severance may be owed under the terms of the employee’s employment agreement, under the federal WARN Act or its equivalent state regulations, or perhaps just under policies established by the company. It is common for companies to offer severance even if they are not required to do so. This may be in exchange for various agreements from the terminated employee, including a release of any claims against the company (see If the employee has been terminated without “cause” as defined by any employment agreement, then the executive has the best opportunity to negotiate a severance package.
In light of the severance pay, the following important issues should be considered Do you have any chances of increasing the severance package offered by the employer? Severance pay(6-12 months for executives and likely higher for CEOs) is typical for executives and possible higher for CEOs. Having knowledge of what other employees have received in similar situations will be of help. It is common for an employee to argue that severance pay should be higher when the termination is associated with a “change in control” of the organization (merger or acquisition). It is important to note that such control switch payments may result in an employee paying a 20% excise tax. the severance package be paid as a lump sum up front, as opposed to spreading it out over time? If the compensation is a continuation of salary over a period of time, the employee will want to ensure that the payments continue even if they die or become disabled. It would be wise for employees, if severance is going to be paid in installments, to request that there be no offsets, mitigations, What about any partially or fully accrued but unpaid bonus as part of the severance pay? Does the continuation pay continue even if the employee gets a new job if the severance pay is a continuation of salary for a period of time? Withholding requirements for federal, state, and local income and employment taxes will apply to any undistributed severance or other compensation paid by the employer to the employee.
In addition to any accrued but unpaid PTO or vacation pay, the severance agreement should cover any balance due on the last day of employment or within a few days after that. A review of the Employee Handbook or the company’s policies should be conducted to determine what is
3. Medical Benefits
According to the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA), a terminated employee can continue to receive medical/health coverage under the company’s policies for up to 18 months after termination (up to 29 months if the employee is disabled as defined by Social Security). Employees are solely responsible for paying the premiums, unless part of a collective bargaining agreement. It is common for terminated employees to request the company to make COBRA payments on their behalf for 6-18 months after they terminated. Due to the potential tax liability for such employer-paid continued medical benefits, we often negotiate for a taxable lump sum payment, sometimes “grossed up” for tax purposes, equal to the cost of continued benefits. Additionally, the employee must decide whether to switch to a cheaper plan or not. In addition, the employee may request that certain other employee benefits (death and disability benefits) continue for some
4. Options and Restricted Stock Units
In addition to stock options, restricted stock units, and performance shares, employees are often given units that must vest and which have limits on when they can be earned or exercised. As part of severance agreements, employees commonly ask for the following items Vesting of stock options or restricted stock units may be accelerated in full or in part. A large percentage of the time, acceleration of equity vesting equals the amount of cash severance for instance, six months of accelerated vesting equals six months of cash severance. The vesting of earnings is typically increased if employees are terminated for reasons related to a change of control by their employer. for employees to exercise vested stock options “cashlessly” so that no out of pocket cash is required to do so. Extended periods for exercising stock options (many stock options require they be exercised within 90 days of termination of employment, but some executives seek longer extensions).
5. Outplacement Assistance
A company might offer its employees the assistance of a free outplacement firm. You can gain new skills with such outplacement firms, such as finding a job or changing careers. If this is part of your severance package, ask the company if it will be included. If you prefer to hire an outplacement firm of your choice with a cash outlay, you can do so (or keep the outlay as is). There are typically 10% to 25% of an employee’s wages going to this benefit.
6. General Release of Liability
Severance payments are made to obtain a general release by the employee of any and all claims the employee may have against the company, whether those claims are known to the employee or not. I will write a lengthy release to attempt to cover your company and its officers, directors, shareholders, employees, subsidiaries, parent companies, affiliates, successors, and assigns from any and all liabilities, complaints, and claims you might have against us. Many releases will outline a number of specific potential claims released, including allegations of age discrimination, discrimination based on disability, violations of civil rights laws, violations of the Family and Medical Leave Act, claims for wrongful termination, and any other claims. A big part of what the company wants is to be committed to absolving itself of any potential liability. As a result, various rights are permanently waived once the employee signs the severance agreement.
When releasing information by means of a typical broad release, there are a number of issues to be considered in order to protect the employee, including the following usually involves a one-sided release, in which the company is released from possible There are some circumstances, however, where it is beneficial and appropriate for the employee to have a mutual release, so they do not have to worry about future litigation from the employer. Any claims that cannot be waived by law should be excluded from the release by the employee. Unless otherwise stated, rights under a severance agreement should not be included in a release by an employee. Any vested rights to employment benefits provided by the company (stock options and retirement benefits) should be excluded in the release by the employee. Specifically, the employee should include any rights he or she may have under indemnification or advance of expenses provisions in the business’s bylaws or any employee officer or director indemnification agreement or any policies of insurance maintained by the business or for the benefit of Any claim for unreimbursed travel or other business expenses should be excluded from the release. It is common for the release to include both known and unknown claims, but some states, such as California, require specific language mandatory by law to waive unknown claims before it will become effective.
It is often a condition of the severance agreement that a departing employee is prohibited from publishing or communicating to anyone any “disparaging” remarks, comments, or statements regarding the business. Disparaging may also be defined so as to include the following Disparaging remarks, comments, or statements impugn the character, honesty, integrity, morality, business acumen, or abilities of an individual or person, especially when trying to explain to a new employer why they left the last employer, so some limitations may be appropriate here. It would be wise for an employee to ask for any non-disparagement clause to apply to all parties equally. An employer-approved version of the following language is included here It shall not authorize or permit any of its current or former officers or directors to make derogatory or disparaging remarks about its employees to any third party or take any reasonable measures to prevent such statements.”
If the employee wants to discuss any reference checks or recommendations from prospective employers, it will be important to know how the firm will handle those requests. It is possible for the employee to request a section in the severance agreement that states Employee has been a valued employee with the company and we will provide positive recommendations to any interested new employers.” Under alternative circumstances, the employee could try to obtain positive recommendation letters from supervisors, and have the company provide those letters to any potential new employers looking for information about the employee’s In many instances, employers will only confirm that the employee worked at their company and that he or she was well regarded.