How to Negotiate A Severance Agreement
We handle severance agreements every day. In fact, we probably have twenty or more severance negotiations occurring at any moment in time during the week. We want share some insights about negotiating severance agreements to help you better understand the deal in front of you and to avoid costly mistakes.
1. THE BASICS
A severance agreement is a legally enforceable agreement between you and your employer. You can negotiate it up front or upon exit and this is called a severance negotiation. Once you sign the agreement, you give up any chance of suing the employer in the future. Always use an attorney to ensure you know what you are receiving. An attorney may have a vastly different opinion of the agreement, your claims and your leverage during negotiations. If a lawyer determines you do have a legal claim to increase the amount of severance, then it takes about ten (10) minutes to explain the agreement. If the lawyer determines you have legal claims to assert, the time period to conclude a severance negotiation may last from two to four weeks, depending on the circumstances. Above all, you need to remember, this severance negotiation is a transaction involving your investment of time and money, not emotions. There is a risk in every severance negotiation that you may end up with what was originally offered, but you will not know until you make a written demand for more severance. Your investment in the attorney’s time to review and negotiate the agreement can have enormous payoffs in terms of a higher settlement, much larger than what you paid in legal fees.
2. HOW MUCH IS TOO MUCH
There are no rules about how much to ask for during severance negotiations. However, the more you demand the more likely you will find yourself in litigation. Think in terms of multiples of your base salary and bonus.
3. SILENCE MEANS SILENCE
All severance agreements contain confidentiality clauses that restrict you from disclosing the contents of the agreement. Although we object to the use of confidentiality in severance agreements because it conceals company bad actors, this is a standard provision in every agreement. It is amazing how many people tell me they heard what other employees received in severance, even though those employees had a severance agreement containing a confidentiality clause. When you disclose your severance you run the risk the employer will find out and you forfeit the severance, while the release of claims remains in force. Do not discuss a deal you already signed, say “no comment”.
4. HOW TO LEVERAGE UP
If do not like what the employer has offered, find a legal claim to assert! Obviously, consult an employment attorney and read articles about breach of contract, discrimination claims, wages etc. In our experience, nine times out of ten, an employee who does not negotiate through an employment attorney will never extract a higher severance amount from the employer.
5. NON-COMPETITION & NON-SOLICITATION PROVISIONS
A severance agreement may have provisions reaffirming previous non-competition and non-solicitation provisions or create brand new ones. You need to become aware of the existence of these provisions because your next job may be prematurely interrupted by the old employer for violating these provisions. As a general rule, if you never signed these types of agreements, do not agree to them in the severance agreement. Most employers will back away if you refuse. However, if you previously signed non-compete and non-solicitation agreements, you will be unable to eliminate them from the severance agreement. You need to consult with an attorney to determine if there exists a way to get out of these restrictions on future employment.
6. TIME LIMITS TO SIGN AGREEMENT & REVOKE
There is no rule or law which says you have to sign a severance agreement by the deadline set by the employer. However, if the severance agreement is governed by a severance plan, the plan may provide for a specific time limit. In our experience, the time limit is set arbitrarily by the employer and is either twenty-one to forty-five days from the date the employer offers it. We generally seek an extension of the deadline while the parties are negotiating in good faith. There are state and federal laws that employers must provide a reasonable period of time to review the agreement. Once you sign and you are over the age of forty, you have seven (7) days to revoke the signed severance agreement. Some employers violate this rule by wording the revocation in such a way that the seventh day revocation deadline is close of business instead of midnight. So read the agreement and pay attention to deadlines. We have never had a client revoke an agreement.
7. NO RIGHT TO REEMPLOYMENT
As a general rule, employees can seek reemployment after they sign severance agreements. Today, large employers have multiple subsidiaries and do not want to limit the ability to hire. In some of our severance negotiations, the employer demands the employee waive any right to seek reemployment.
8. SEVERANCE PLANS & ERISA
You probably did not know it, but a severance agreement may be governed by a severance plan under federal law. ERISA is a federal statute that governs your rights under a company sponsored severance plan. The plan contains procedures for filing a claim in the event you are denied severance. Generally, all employees are participants in a severance plan offered by the employer. The plan controls how much severance you are entitled to. Bottom line, the plan requires you to sign a release agreement to obtain benefits. We have litigated cases where the severance agreement itself becomes the severance plan, containing one participant, but the availability of this claim only applies when the employer revokes the severance agreement after it was issued.
9. MUTUAL RELEASES OF CLAIMS
Always ask for a mutual release of claims in every severance agreement. This means the agreement contains a release of all claims by the employer against you, even though you did not do anything to warrant a legal case by the employer. It is just a cleaner divorce, if both parties agree to a mutual release of claims. You never know what an employer might do in the future.
10. NO SETTLEMENT, BUT LITIGATION
If the employer refuses to negotiate an increase in severance or more favorable severance terms, your next step is to file administrative complaints with state and federal agencies or file a lawsuit. Obviously, a lawsuit should be last resort alternative. Remember, 98% of all cases settle, but it is just a matter of when. You may have to expend resources to litigate the case to convince the other party of their liability. One caveat, do not litigate cases which have borderline claims (50/50).