Employee Tip: Things to Consider When Your Employer Offers a Severance Agreement

If an employer has offered you a severance agreement, you should consider the following things.

Note: this post does not give legal advice. For legal advice about your severance situation, please contact an attorney.  To reach me, click here:

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  • Consider deadlines, and act promptly.

The moment you are given a severance agreement, check it for a deadline. Chances are, your employer gave you a deadline in which you must agree to, or decline, the severance. For workers 40 years old or older, federal law requires employers give at least a 21-day period to review the severance agreement.

If the employer has not given you a reasonable amount of time, or rushes your decision, that is a red flag. An employer who is interested in being fair will understand that you cannot review or make decisions about an important document on a moment’s notice.

If you are being rushed, consider asking for more time. Make any such requests in writing. If you are over 40 and the employer is asking you for a decision in fewer than 21 days, consider telling the employer (politely, and in writing) that the law requires you be provided at least 21 days.

Review the agreement promptly, and if you decide you want an attorney to review the agreement, make all such arrangements sooner rather than later. You should not wait until the last day before the deadline to review the severance agreement, or wait until that point to decide whether you want to speak to an attorney about the agreement. You should take these steps early on.

  • Know that in signing a severance agreement you will be giving up important things: first and foremost, you’ll be giving up your right to pursue legal claims against the employer that could have far more potential value than the severance payment.

The main benefit to you in signing a severance agreement is to receive payment and/or other beneficial terms provided in the agreement.

The main benefit to the employer is that, in exchange for your receipt of payment and beneficial terms, you will be signing away your right to bring legal claims against the employer. (A severance agreement may also have the worker give up other things, e.g. rights to work for competitors, etc., but usually the waiver of potential legal claims is the biggest concession/value given up by the worker).

Know there could be substantial value in the potential legal claims you are giving up. The only reliable way to know is to have a competent employee rights attorney assess your potential legal claims and their value as compared to the offered severance payment.

When I review a severance agreement and evaluate that given employee’s potential legal claims, sometimes I feel the proposed severance payment is worth far less than the value of potential legal claims.  In those instances, the employee (with an attorney’s assistance)  has significant leverage in negotiating to increase the severance, or may have the option to forego the severance and pursue a legal action instead.

Because of this, it is probably worth your while to have an employee rights attorney assess potential claims, and their potential value. That attorney should be able to tell you why the severance offer (as compared to potential legal claims) is a fair offer, or why it is too low.

  • Know the employer likely did not have to provide you with a severance agreement or severance pay.

Unless you and the employer are among the uncommon few who have an employment contract or other documented legal authority that requires a severance be paid, the employer has no legal obligation to pay you any severance monies when terminating your employment. Accordingly, no matter how unfair your termination may be, do not assume you are entitled to anything, or make demands based on the assumption you are “owed” a severance.

The employer’s severance offer may seem unfair in light of your years of service, the quality of your work, and other factors. But no matter how unfair your termination, unless you have a contract or other legal authority requiring you be paid severance pay, the law does not require that you get any severance pay.

Employers know that severance pay is not required, so if you assume you are “entitled” to more pay, the employer may react negatively to any such assumption of entitlement.

  • Know the severance terms are negotiable, and can (and in some cases, must) be changed.

Many employees will accept a severance agreement as is, or will assume there is no room for negotiation. Do not assume this. Many employers will negotiate and change terms. I have found this to be the case even with employer that said (prior to my involvement in negotiations) that they would not negotiate with my client-employee. An employer can always say they will not negotiate. But whether they will negotiate is a matter that is highly dependent on circumstances, e.g. whether the employee has potential legal claims, whether he or she retained an attorney who could articulate and pursue those claims, etc.

There are instances where some employees must ask for changes to a proposed severance agreement. For example, a proposed severance agreement may need to be changed (or not signed at all) if it has unlawful terms, or if it has terms that would make a career impossible, such as very restrictive non-compete terms that block nearly all future employment. An employer who negotiates in good faith should be open to hearing your reasonable requests for revisions, and to revising its severance language.

  • Consider whether you have leverage (namely, potential legal claims) to negotiate and increase the severance monies offered.

As mentioned, you shouldn’t ask the employer for more money just because you feel entitled to it, or because you feel more money would be more “fair.” However, you should consider asking for more money if you have legitimate leverage to do so.

An employee’s main form of leverage is the potential legal claims that he or she has. (I have a post here about what types of factors suggest an employee has a “good case”). If you potentially have a good case or claims against the employer, this may provide leverage to negotiate a higher severance payment. An employment lawyer can best evaluate whether you have any potential legal claims, and whether those claims have a potentially significant value.

Note that for employees who do not have attorneys, most employers do not fear those employees’ threats of potential legal claims no matter how potentially meritorious.  Most employees who try making legal threats, or try other forms of leverage on their own, usually botch any severance improvement opportunities they otherwise could have had. Sometimes, employers are upset by such attempts and the attempts actually move things backward.  Consider speaking with an employee rights attorney, as such attorneys (if competent and experienced) have been through many severance negotiations and have legal knowledge and trial-and-error based knowledge about what types of leverage actually work.

Tread carefully, and thoroughly assess your leverage and strengths before you ask for a higher severance payment.

  • Review the severance agreement for penalties or liquidated damages.

Severance agreements usually have penalties that will be applied to you if you breach the agreement. For example, it is common for a severance to (1) require the employee keep the severance (namely, its value or dollar amount) confidential; and (2) require that, if the employee breaches the confidentiality requirement, he or she will have to pay a certain value (sometimes repay the full severance value) as a penalty.

Another common penalty provision is where a severance requires an employee to pay the employer’s attorneys fees if a court finds the employee breached the contract.

As you review your severance, pay close attention to any penalty provisions. While you may feel (understandably) there will likely be no future disputes over the severance that would trigger the penalties, it is still important you know the penalties up front. If the penalties are particularly strict or one-sided against you, that may tell you that: (1) you’d stand to lose a lot, and the employer to gain a lot, if the employer pursued and won a breach action against you; and (2) thus, the strict penalty provision may motivate the employer to litigate under lesser circumstances than it would usually take.

  • Review confidentiality terms closely, make sure you understand them, and start following them immediately.

Employers are understandably very concerned that the parties keep confidential the severance terms, especially the amount of money paid. Pay special attention to the wording of any confidentiality provision in your severance agreement. Make sure you read all confidentiality language in full, understand it, and do not violate it. A breach of confidentiality- perhaps more than any other type of breach- is likeliest to trigger strict penalty provisions and to motivate litigation.

You should start keeping things confidential well before you sign the severance agreement and before the confidentiality provision officially applies. If you start discussing severance numbers with others, that could create problems in the employer’s perception and have a negative effect on you even if you feel you did not violate the agreement. (Note, however, that confidentiality terms usually allow certain exceptions where an employee can talk to an attorney and other specified types of persons).

You may have former coworkers ask you “Did you settle? How much did you get?” The best answer is no answer. Sometimes, the severance itself will supply you with an answer phrase to respond with, such as “The matter has been resolved.” In any event, do not discuss the severance or its dollar amounts.

  • Make sure the severance agreement includes language that does not hurt your prospects of receiving unemployment income.

While unemployment matters depend on the State involved and circumstances, workers who are fired or laid off from a job are more often eligible for unemployment insurance income as compared to those who voluntarily resign. Related to this, sometimes the language or terms of a severance agreement can hurt one’s chances to receive unemployment.

For example, say your severance agreement states that you “voluntarily resigned” when in fact you were terminated. For some purposes (e.g. job-hunting) it may sound appealing to retroactively “agree” with the employer that you “resigned.” However, for unemployment purposes this could potentially present risk. Thus if you didn’t resign, it may help to have the employer agree, in the severance agreement, to state the truth that your termination was not voluntary and should not be reported as a resignation to unemployment- authorities.

There are other unemployment pitfalls that can arise in a severance agreement, based on its particular terms and language. An attorney could help you spot and address such issues.

  • Check how the severance addresses any outstanding money that may be owed (e.g. bonuses and commissions you’d already earned, vacation pay accrued, etc.), and any benefits that may be owed (e.g. check when the severance says health insurance and pension payments will be discontinued).

When you are notified your job will end, you should find out the status of any remaining money you may be owed. For example, say you have three weeks of unused vacation pay accrued at the point you are terminated. You should review the severance agreement’s language and see whether it says you will be paid out for this unused vacation time.

If the severance agreement says nothing about whether vacation pay (or earned bonuses, commissions, etc.) will be paid out, you should assume they will not be paid out.

It is also important you review the severance for benefits issues, such as whether health insurance will be provided, at what cost to you, and for how long. You should also check whether 401k and/or pension benefits will be affected by your termination and severance agreement.

If the severance agreement is not clear what will happen with monies and benefits like those above, then before signing the agreement you or your attorney should consider speaking to an appropriate representative of the employer– probably someone in HR designated as a benefits contact– and get official status on all those issues, and what will happen with them in light of the severance.

Most severance agreements have terms indicating that no “side” agreements are to be honored, only the terms in the severance agreement. So, for example, if the employer sends a worker emails assuring him that he will be paid the big bonus he earned, but gives him a severance agreement that makes no mention of the bonus, it is likely the severance agreement would be the legally-controlling document. Thus, a worker could be out of luck if he signs a severance agreement that makes no mention of what was promised on the side and the employer does not make the side-promised payment.

  • Check the severance language for one-sided or unfair terms.

Too often, a severance agreement drafted by the employer contains several one-sided terms that benefit the employer. For example, it is common for a severance agreement to: (1) state that, if a court finds the employee breached the agreement, then the employee (the loser in litigation) has to pay the employer’s attorney fees; (2) but if the employer is found to have breached the agreement, there is no similar requirement that the employer pay the winning- employee’s legal fees.

Similarly, severance agreements often require that employees have to keep the severance terms confidential and not disparage the employer, but do not require the employer to follow any confidentiality or non-disparagement requirements.

Ideally, an employee or their attorneys could fix these one-sided terms if possible. That is, make the terms mutual, or have them removed altogether.

If you are unable to get such one-sided terms changed, then you must decide whether you can live with them. Often, these one-sided provisions, while not ideal, are unlikely to ever come into play as a practical matter and are not important enough to be deal-breakers, so to speak. However, such one-sided terms may be cause for alarm that the employer does not intend to deal fairly with you- particularly if the employer is exhibiting other adverse conduct (e.g. making an unreasonably low severance offer as compared to value of potential legal claims, refusing to allow you time for review, etc.).

If an employer is showing a pattern of questionable conduct, you should be less inclined to accept the severance agreement at face value, and more inclined to review the severance agreement thoroughly.

  • Consider having an attorney review the severance agreement and/or assisting in negotiations.

An employment attorney could provide value by reviewing the severance terms, by evaluating your potential legal claims and leverage, and/or by assisting in severance negotiations. Such assistance can often be done for an affordable charge or on a contingency basis where no out-of-pocket fees are paid. I personally offer a free evaluation of an employee’s potential legal claims and severance leverage.  When I assist workers in negotiations and/or in litigation, I often do so on a contingency basis where I am not paid fees unless my client’s financial situation is improved upon. Whether you select me or another attorney, the attorney should be able to describe for you the potential value you can gain from legal services before you are charged anything.

Note: this post does not give legal advice. For legal advice about your severance situation, please contact an attorney.  To reach me, click here:

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9 Comments

Filed under Employee Tip - Severance & Settlement

9 responses to “Employee Tip: Things to Consider When Your Employer Offers a Severance Agreement

  1. Hi. I am a long time reader. I wanted to say that I like your blog and the layout.

    Peter Quinn

  2. Robert Flores

    Nice article

    Is there a website for severance laws in California?
    My wife works from a company uses hazardous chemicals. From time to time she has minor exposure to these chemicals.
    My wife was asked to sign a severance agreement that takes away rights if she becomes sick or ill after terminiation. Is this fair?

    • Hi Robert:

      Thanks for your message. You are correct that those are CA law issues I could not assist with.

      For a general search for CA employee rights attorneys, there is an employee-rights-attorney search (by State) at http://www.nela.org.

      I know of one employee rights blog about CA law, and that is the California Employee Rights Blog (http://www.calemployeerightsblog.com/) authored by Peters Law Group (http://www.peterslawgroup.com/).

      I actually used to work with Jim Peters of that firm, and he is a very good attorney and reasonable to work with. Jim has definitely worked with severance agreements. Your wife’s issues may also implicate CA workers compensation laws.

      I wish you the best. Thanks for writing.

      Mike

  3. Kit

    Thank you for this very valuable and informative blog.

    Severance agreements can be daunting to employees who are still reeling from being terminated and now face the prospect of a job search in this economy.

    I wondered if in Wisconsin, as in other states, laid-off employees who sign a severance or separation agreement waiving rights in exchange for severance pay and other considerations are eligible for unemployment benefits from the date of layoff – and need not wait for their severance payments to expire?

    • Thank you for your kind message. In my view, Wisconsin law is unclear whether severance monies count as wages that delay the onset of unemployment. As a matter of how the unemployment division interprets the law, several Wisconsin claimants I know reported they were told by unemployment that receipt of severance monies would delay unemployment until the severance payments are done.

      The bottom line is whatever the particular unemployment office decides is what the claimant has to live with.

      If a Wisconsin employee is considering a severance offer, they should call their unemployment office and ask, if they were to accept the offered severance payments, whether those payments would delay unemployment benefits until the completion of the severance payments.

  4. Pingback: Executives & Professionals: Consider These Things in Event of Potential/Actual Termination « WI Employee Rights Lawyers, Wages, Sexual Harassment, H1B

  5. Pingback: Executives & Professionals: Consider These Things in Event of Potential/Actual Termination | Peterson, Berk & Cross

  6. fuzzylogic27

    What is the average Wisconsin ERD mediation settlement amount consist of?(as in lost wages only- no compensation for pain & suffering?) Also, does an ERD settlement prohibit filing the same case in Federal court and the EEOC?

    • In theory, a worker and employer could reach a settlement where only the ERD claims are waived, and other claims (like EEOC, Federal Court, etc.) could still continue. But as a practical matter, in hundreds of employment settlements I’ve dealt with, I’ve never seen an employer agree to that type of partial settlement that I can remember. When employers settle, they want to waive all claims at issue, and they make that a deal-breaker. So if you’re an ERD complainant and want to settle, you should keep in mind the employer likely will not settle with you unless you agree not to pursue ANY claims, i.e. ERD, Federal, etc. However, you should know an ERD- mediation settlement CAN include extra payment for waiver of potential Federal rights/claims that have more value than the ERD claims. For example, you could reach an ERD- mediation settlement — if the employer agrees– that includes payment for you waiving Federal claims with punitive damages (some Federal discrimination claims have punitive damages but no ERD claims do at present). A worker could try to seek higher payment for such a settlement, based on waiver of potential Federal claims and those claims’ potential value.

      Regarding your question about an “average” ERD settlement amount, I could not answer that. No statistics are kept to my knowledge. Even if you had an average, that would not say much about your own individual case. The potential values of workers’ ERD claims can be hugely different from worker to worker, depending on the strength of the evidence and– even more importantly– how much income the worker has lost or stands to lose. If a worker is not represented by an attorney, as a general matter employers do not offer much to settle– it is common for employers to offer @$0-5,000 for “nuisance value” to settle a case early rather than pay more than the nuisance amount to defend the case. Of course, there are many times where the employer thinks the worker’s case has no merit, but where the worker thinks there is (and sometimes an attorney or judge agrees with that worker).

      If you want a true evaluation of your own claims, I’d strongly recommend you consult with an attorney if the cost is affordable. An experienced attorney’s case evaluation alone has significant value. Often, workers (understandably) overvalue their claims because they don’t have knowledge of the legal parameters or circumstances that affect a case’s value. Other times, workers undervalue their situations because they are not aware of positive factors, such as potential legal claims they were not aware of, etc.

      Hope this information helps.

      Mike

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