Your soon-to-be former employer has just provided you with a severance package. After reviewing it, you might be happy that you are about to receive money, but you have questions:
This comprehensive how-to guide will take you in detail through he different parts of your severance package so that you will better understand the agreement you are considering signing.
There is not a standard definition for severance package. The term “Severance Package” usually refers to both a severance agreement and severance pay, however it is also used to refer to either one of those individually.
Negotiation Of Severance Packages
A typical severance package includes both a severance agreement and severance pay. This is done to provide the employee with certain financial benefits (payments of money, medical coverage, etc.) in exchange for the employee agreeing not to sue or disparage the company.
Severance pay is usually referred to as the combination of compensation and/or benefits that is given to an employee leaves a company.
The severance agreement is the document or set of documents that you are required to sign in order to receive the severance pay. The severance agreement is usually several pages long and often contains various parts, including a release of all legal claims, confidentiality agreement, and non-disparagement agreement.
Severance Pay Law
Neither the California Labor Code nor the federal Fair Labor Standards Act require employers to offer severance packages to departing employees. Instead, severance packages are provided by employers to accomplish a specific goal.
Sometimes employers offer severance packages because they are required to do so by the terms of the employment agreement with the employee. This is a rare perk that most often is provided only to high level C-suite executives (CEOs, Chief Financial Officer, Chief Marketing Office, Chief Operating Officer).
Companies that provide C-suite officers with pre-employment Severance Packages do so for several reasons. Often times the individual is highly sought after and is being recruited away from an existing lucrative job. New job offers also generally require the executive to upend his or her life and relocate his/her family to a new area.
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If the new role does not work out, the pre-negotiated severance ensures the executive is compensated, to some degree, for leaving a former job and relocating to a new area.
The most common reason employers offer Severance Packages is because it wants to end its relationship with the employee—forever. Employees who have been wrongfully terminated, harassed or who have experienced wage theft can wait to sue their former employer for up to four years.
While most employees leave their employment without any legal reason to lookback and sue, providing a severance package to an outgoing employee ensures that the company can safely put away the relationship for good.
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Non-competition agreements in California are invalid and unenforceable. They have been, to some degree, for more than 150 years. But employers have found ways to craft these agreements in ways that effectively keep their former employees from competing against them.
The reason most important to employers for offering severance packages is to resolve legal claims you might have against the company. Sometimes the employee is not even aware that he or she might be able to file a lawsuit against the company. By providing a severance, the company can avoid a long and costly lawsuit.
Most employees presented with a severance package wonder, what is a typical severance pay amount? It tends to be the most important part of the agreement you will consider. There is no one-size-fits-all severance amount.
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You should be cautioned against comparing your severance pay amount against a formula because a good severance amount really depends on a number of factors, some of which are hard for non-lawyers to value.
Many companies offer between one and three weeks of your current pay for every year that you have been employed with the company.
Evaluating whether the severance pay amount provided is good depends on many different factors, including the size of your company, the industry in which the company works, the stage of your company (if it is a startup), the length of your employment, your position, and the reasons for your departure, and the terms the company is requesting. An experienced severance attorney will have reviewed hundreds of these agreements and will be able to help you assess whether you have been provided a fair value, given these factors.
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In addition to a lump sum payment, Companies often provide COBRA continuation payments. COBRA is the law that allows employees who lose their jobs to remain on their employer-provided health plan.
Once you have been terminated, if you opt to continue your health insurance under COBRA you are responsible for paying the full insurance premium (employer and employee portion).
As part of your severance package, employers sometimes include an amount to cover reimbursement of the employer’s premium for some period of time. The reimbursement is generally in addition to the lump sum and is only available if you exercise your right to COBRA.
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Many employees decide not to exercise COBRA. Sometimes a spouse has a better health insurance plan or the COBRA premiums are too expensive. Some employees try to “cash-out” the reimbursement and roll it into the lump sum.
The severance agreement is a legally binding contract between you and the Company. While no severance agreement is exactly alike, they all generally contain the following provisions.
Your severance agreement will require you to promise not to sue your former company. This portion of the agreement is contained in the “General Release of Claims” section. Often times it is the longest section of the agreement, sometimes spanning multiple pages.
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The General Release is the portion where you give up your right to sue the company for any and all legal claims you might have against it. This includes, among other things, giving up the right to sue for:
One of the most important reasons to have a severance review attorney review is to make sure you are being provided a fair amount. A severance agreement attorney will be able to review the circumstances of your termination or resignation from your company to help you understand whether you have any viable legal claims that could allow you to ask for a greater amount in severance pay.
Even though your severance agreement requires you to release legal claims you have against your employer, there are certain claims that you are not legally allowed to waive:
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Employers are very concerned with keeping severance negotiations secret. While the fact that your employer provides a severance is likely not a secret, the amount it pays you is highly confidential. To prevent other employees from learning how much severance the company provides to employees, the company will require you to sign a confidentiality agreement as part of your severance package.
Some confidentiality agreements are narrow and only require you to keep the terms (the amount and language of the agreement) confidential. Others are very broad and prohibit you from disclosing to anyone (including immediate family members) the amount, terms, existence and even any negotiations leading up to your severance agreement.
Employers are increasingly concerned about their reputations, especially online. They want to avoid negative reviews on websites like Glassdoor, Yelp and LinkedIn. To do so, they often include a non-disparagement provision.
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The non-disparagement clause protects the company from these types of negative reviews by prohibiting you disparaging or criticizing the company, its employees, its products and services.
Like confidentiality agreements, non-disparagement agreements can be drafted narrowly or broadly. Broad non-disparagement clauses are vague and unclear about what you may and may not say, to whom, and in what manner.
Because your employer is almost always the one benefiting from the one-sided non-disparagement agreement, you should carefully scrutinize what it is that you will be required to do.
Negotiating For More Severance Pay
What is not in your severance agreement can be just as important as what is in your severance agreement. The following are terms that you might not find in your agreement, but which are important to consider before signing.
Most non-disparagement agreements are one-sided. That means that while you are prohibited from making critical comments about the Company, the Company is not prohibited from doing the same to you.
There are certain circumstances where you should consider making the non-disparagement agreement mutual—that means prohibiting the Company from making critical comments about you. This protects you from the Company disparaging you to former co-workers, or more importantly, future employers.
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Sometimes employers provide a sign-on bonus as part of their employment offer. Many sign-on bonuses are subject to a clawback. The clawback provision of the agreement usually states that in the event the employee is terminated or resigns within a certain period of time, the employee must pay back either the full amount or pro rata share of the sign-on bonus.
If the sign-on bonus clawback is not explicitly addressed in your severance agreement, you will be legally obligated to pay back your bonus. This can have significant unforeseen tax consequences.
Acme pays Owen an upfront $5, 000 sign-on bonus that is subject to a one-year clawback if the employee leaves the company. That $5, 000 is taxable income and the Owen will have to pay taxes on that amount. If Owen leaves the company,
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