Severance Defined: a gift, something you have earned, you give up legal claims for it, you negotiated well to get it, it’s a bonus so go to the bank, a windfall because you got another job quickly!
Severance can be negotiated upfront before starting the new position or it can be negotiated on the backend.
Upfront Severance Negotiation: You can negotiate severance before you start working for the new employer and this is typically associated with the negotiation of the employment contract. Employers will attach the severance agreement inside the employment contract or create a separate agreement. You can determine whether a public company offers a severance package in their employment agreements by searching the company profiles at SEC.gov (public companies only). You can also ask the company during the offer stage if they can negotiate severance upfront. A company may even negotiate severance upfront to an at-will employee, but you would not know unless you posed the question- so don’t forget to ask or you will not receive!
Let’s assume you are at the negotiation table and the parties are discussing the terms of the new employment. How do you set the right amount of severance to ask for? There is no right or wrong answer to this question. Please note, severance is often referred to as 1x, 2x or 3x of your base salary. As a rule of thumb, individuals ask for one year typically- but don’t shoot me if the company was willing to give two years. Seriously, a one year severance arrangement is the reality for most people. An executive or employee can “extract” a two or three year severance only in a narrow set of circumstances. First, you must possess an incredible amount of negotiating leverage to extract a straight 2x or 3x severance. This means you are either a very popular and sought after executive/employee or huge revenues just follow you at every company. Please note, anyone can negotiate a 2x or 3x severance, it just depends on how well you can sell the idea and what your worth is. Second, you can obtain a pre-offer 2x or 3x severance by way of a change-in-control agreement. This is truly a narrow circumstance because all the variable conditions set forth in the change-in-control plan have to be satisfied. The board of directors will dictate what those variables are, and the bar is often set pretty high. During the pre-offer negotiations an executive can bargain for a change-in-control severance, but you better know what you are talking about before you make the proposal and have a good reason(s) for the board to grant you this type of severance.
Like any severance, in order to receive the severance monies you will of course need to sign your legal rights away. The company is literally buying your known or unknown claims well in advance of your departure from the company. Now, there is a rule about settling and waiving future claims- its against public policy and the courts do not enforce such future waivers. What normally happens during pre-offer severance negotiations is the parties will negotiate a severance deal involving two components: (1) you agree to sign a mutually agreeable severance and general release of claims upon termination (usually termination for good reason, for no cause, or change-in-control); and (2) the parties will agree during the pre-offer stage on the amount of money, i.e. 1x, 2x or 3x.
How does “termination for cause”, “without cause” and “termination for good reason” affect a severance payout? These terms I just mentioned can be placed in a severance and/or employment agreement. If you are terminated for cause and you cannot defend or cure the “for cause” allegation- this means you really screwed up (or intentionally set up) and you will not be receiving severance! If there is a “without cause” reason given by the employer, you will get severance. In this situation you may have been smart enough to craft language into the severance agreement that automatically grants you a severance for quitting for “no reason” given. If you got this provision in your favor, you have negotiation power and guts. Good work! In a majority of cases, if you quit without cause or the company terminates without cause, you will not receive severance pay. The remaining way to get severance is to demonstrate a good reason for your sudden departure, such as office relocation, material change in job duties, demotion, change in compensation-downward etc. Under this last method, you will need to have your material evidence ready to present directly to the company and their counsel.
It is a good idea to keep a confidential file or files at home, wherein you store emails, memos, and other supportive evidence. You can also store whistle blower evidence, but be careful whether you pull the trigger on this sort of thing because it can have professional repercussions if the word got out. However, a well played game of bluff on a whistle blower claim, especially in the Sarbanes-Sox era, does have tidy rewards.
Backend Termination Severance Negotiation: This may well be the most common severance negotiation most people will encounter. Obviously, you did not negotiate or could not negotiate a severance agreement at the start of employment. I want to discuss how to maximize your return on investment of your time and money. Think of this deal as an investment transaction. You are going to put in time throughout your employment to collect favorable evidence (documents and statements), time with your attorney, and then spend money on legal fees. The goal is to obtain a severance that easily pays off the legal fees and your time spent, but also returns a hefty windfall!
In order to conduct a productive severance negotiation, you need to collect documents, statements and other evidence throughout your employment. This may sound strange and evoke ideas of paranoia. But contemporaneous journal entries along with gathering evidence in your personal “home file,” will produce the types of negotiation fire-power you will need to obtain a substantial severance. Yes, I am pre-thinking the end result, but you have to.
I will explain it in a different way. When you go to an employment attorney with the news you just received a severance agreement and you are still carrying your box of personal belongings, the attorney will want to know every factual detail of your career with the former company. You will end up recreating a factual timeline from your memory, notes, emails, documents and conversations with co-workers. You may not capture all the details, missing vital factual evidence. An ongoing contemporaneous effort to collect data will save you a great deal of time and money!
Put it this way, you need to protect and save your own butt because there is no one at your company who will! Don’t be suckered into the “firm mentality,” that the company would never harm you because you are so loyal and trusting of the company.
A successful severance negotiation involves “issue spotting.” But if you are not an attorney how do you know what to look for? Use your instincts and the smell test. If occurrences at work “smell bad”, well they probably are. There exists a phrase, “being thrown under the bus.” This happens when everyone suddenly treats you differently and you do not know why. Well, you better find out why and start taking notes and names. But keep your activities to yourself and don’t disclose your intentions to anyone. There is nothing worse than showing your hand before you completed your own investigation. Most often it will be a false alarm, but what if the inevitable termination process has begun. You may have been run over by that yellow bus.
Start learning the basics about employment law. Every employee falls into one or more protected classifications of age, gender, sex, disability, religious belief, national origin and race. If an employer uses these classifications in order make employment decisions, you have a violation of state and federal laws. You can quickly study up on discrimination and retaliation in those areas at the EEOC.gov. Of course, there are more complex issues to spot, such as whistle blowing state and federal law violations. Just starting researching and you will pick up the basic issue spotting techniques quickly.
Once you have discovered the possible reasons for your termination, create a factual chronology using names, dates and exact statements made during conversations you have had. This chronology will turn into your sworn affidavit. From this sworn affidavit, a demand letter can be created. Your affidavit will form the factual background of the claims. You or your attorney can fill in the legal claims asserted. At the conclusion of your demand letter, you should spell out what you are demanding. Most people demand the following items: (1) severance money; (2) mutual release of claims known or unknown; (3) mutual non-disparagement; (4) mutual confidentiality; (5) a positive letter of reference; (6) agreement not to contest unemployment; (7) agreement that you are not required to mitigate your severance damages by getting new employment; (8) payment made lump sum, in case the employer suddenly gets sold. Obviously, there are more terms to add, but these are the general terms requested during severance.
After the demand letter containing your offer is received, the employer will send a letter back to you or your legal counsel rejecting everything you asserted in your demand. The employer’s role is to deny everything, so do not feel shocked. The employer will then make a counter offer. This first counter offer will set the range of offers between the parties. Further negotiations will seek to find a mid point between the two offers. Each counter offer made can be any round number the party wants to offer. There are no rules that govern this process. You do not have to match the offer made by the other party. However, always remember that your offer amount sends a particular message. If your offer is too high, you are indicating you have a really good case and do not want to settle. Also true is the employer’s very low offer, indicating unwillingness to settle because the legal claims have no merit. I will note that some employers never negotiate with anything more than nuisance value, or $5,000 to $10,000 maximum offer. The presence of an employment attorney representing an employee will have an immediate positive impact on the negotiations.
The severance and general release agreement will often contain a non-compete and non-solicitation agreement. These are called restrictive covenants and usually reflect the fact the employer never had you sign these promises while you were employed. Employees should not agree to sign these covenants contained in severance agreements, because they impair you ability to earn a livelihood. Unless you want to be restricted from doing what you do best. In a worst case situation, the employee should demand an additional premium for having to sit out the next several months of the non-compete period.
The severance negotiation is concluded when the parties sign the agreement. Execution of the agreement can occur through two separate documents, exchanged through mail or facsimile. Just make sure there is a provision that allows for such an execution, otherwise there is no formal ratification. You should hold onto the agreement in your home file for quick reference. Do not communicate with others about the details of your agreement because the employer may find out. Once you breached your agreement by disclosing the settlement, the employer may be entitled to a return of the severance pay.
There are more issues to discuss about severance, but these are the basic concepts for you understand. I will write new articles on this subject in the near future. If you have any questions, please contact my office at (203) 255-4150 or email@example.com.
Mark P. Carey