The Ins and Outs of Negotiating Severance Agreements

August 6, 2013

 

The Basics

 

The majority of employees are employees “at will.”  This means that an employer may (subject to anti-retaliation and discrimination laws) hire, fire or discipline for good reason, bad reason or no reason at all.  In these situations, employees are not entitled to “severance.”

Nevertheless providing severance agreements is a common practice and one that is beneficial to both employers and employees alike.  Severance agreements provide employees with the obvious financial support while they search for a new job.  Employers often utilize such agreements in exchange for a waiver of potential discrimination and retaliation claims or as consideration for non-disparagement and restrictive covenants.  Severance pay is typically a portion of salary and medical benefits; however, many executive severance packages include stock, bonuses, incentive plans, and health care benefit extensions.  In terms of timing, there are three opportunities to negotiate and sign a severance agreement – at the time of hire, when asked to sign a restrictive covenant, or at the time of termination.

 

Negotiation

 

While most severance agreements contain boilerplate language utilized by an employer, there may be some room for negotiation, especially when discussing severance agreements at the onset of employment.  Generally, employers can benefit from engaging in the negotiation process in that if an employee later challenges an agreement or sues for breach, the court is likely to consider the agreement fair because the employee engaged in the arms-length negotiation process.  Moreover, the court will be less likely to entertain the argument that the employee did not understand the terms of the agreement.    Although some areas of a severance agreement are usually not easily negotiated (e.g., the scope of the release), there may be room for negotiation in several areas.  Typical areas of negotiation of a Severance include the following: 

> The Amount of Severance.  This usually has some relation to years of service or anticipated service but it is often negotiable to some degree, especially if the employee has a potential claim against the Employer.  In situations where an amount of severance exceeds normal severances, Employers usually require a strict confidentiality clause to ensure that the Employee does not inform other Employees of the amount of severance.

> Restrictive Covenants.  Employers are usually wise to negotiate restrictive covenants at the outset of employment but not all restrictive covenants will be enforceable at the termination of employment nor are the Employers’ business needs always the same at the end of the relationship.  Renegotiating restrictive covenants in a post-employment situation may increase the likelihood of enforceability and make the employee more agreeable to abiding by them.

> Non-disparagement and reference agreements.  Most employers want protection from former disgruntled employees disparaging the company.  Likewise, an employees’ ability to earn a living may depend on future references.  Thus, both parties typically want to protect their own reputational interest.  Often, mid-size to large companies will only agree to limited non-disparagement as to the employee since it cannot control the company rumor mill but most companies are typically more amenable to agreeing to favorable or neutral references.

> Change of control clauses.  These are usually applicable to executives.  At the outset of the employment relationship, an executive will want to establish what happens if the company is bought out.  The executive will want greater severance protections if he is forced out due to a change of ownership or management. Change of control clauses should be closely examined at the outset and termination of employment relationships.

> Incentive compensation.  Executives should closely examine the ramifications of employment termination on incentive compensation plans.  On occasion, the plan agreements provide for acceleration of benefits upon certain triggers such as retirement.  Executives who are recipients of incentive compensation should have an attorney review the plan documents before signing an agreement. 

 

Advice for Employees

 

Take your time. Terminated employees are advised not to sign a severance agreement on the spot.  Instead you should take time to review the entire agreement.  Employees are generally given twenty-one (21) days (in relation to individual terminations) to forty-five (45) days (in relation to group lay-offs) to consider such offers.  These review periods are generally for an Employer to ensure the releases are enforceable under the Older Workers Protection Act but they also afford employees time to review the agreements with counsel. 

Understand waivers and general releases.  Employers may entice terminated employees with more money/benefits if they sign a general release or a waiver of liability for discrimination claims arising under the Americans with Disabilities Act (ADA), Age Discrimination in Employment Act (ADEA), Title VII, etc.  As always, one should be careful as to what they are signing away.  Such releases may provide employees with a bargaining chip to negotiate a higher severance pay as employers might be willing to spend a little more to minimize their risk of costly litigation.

Immediately contact an experienced attorney.  It is highly recommended that you review severance agreements with an experienced attorney to review the language and explain your rights concerning the contractual agreement, unemployment compensation and consider if you have any claims that could be otherwise waived and released forever upon signing the agreement. 

 

 

Brendan D. Hennessy is an experienced employment law attorney.  His practice represents and counsels employers and employees in employment law matters.  He can be reached at (484) 875-3111 or bhennessy@hennessylawfirm.com.

 

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Brendan D. Hennessy, Esquire is an experienced attorney and provides an assortment of legal services, focusing in the area of Employment Law.
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