Severance Agreement Negotiation Tips
A severance agreement can be daunting to negotiate. What’s that you say? That’s right: SEVERANCE AGREEMENTS ARE NEGOTIABLE. That’s why we’ve drafted this brief guide to give you some things to consider when you’re negotiating yours.
Severance Pay: Show Me the Money!
To us, you have to start with the “how much?” question first and work from there. If your payout is big, maybe some of the smaller details don’t matter. But if it’s a relatively smaller payout, maybe the benefit details add up.
Regardless of the amount of the payout, there are other questions to consider. How is it going to be paid? How long? In what form?
For instance, if you’re being paid a severance as though it were a continuation of your normal salary, do those payments continue if you’re disabled, or worse, die? Negotiate it.
Does your severance include bonus payments or is it separate? Clarify if the severance pay includes any partial or fully earned bonuses.
What if you get a new job? If severance pay is being treated as “continued salary,” make sure that the payments continue even if you get a new job. I mean, they fired you. It’s none of their business if you get a new job.
PRO TIP: Remember that any severance or other compensation is subject to federal, state, and/or local income and employment taxes. Consult with an accountant to make sure you’re being compensated in the most tax-friendly way possible.
Severance Payments Are Negotiable
One-time payouts are always negotiable. But let’s assume a continuing salary situation. Negotiate the amount and duration of severance payments. After all, like a structured settlement, you’re allowing the employer to pay you out over time which certainly has its advantages.
Our take: it doesn’t hurt to ask, especially if you know what other employees have been offered in the past. The worst your soon-to-be-ex-employer can say is “no.”
If your job separation is in connection with a “change in control” of the company (merger or other acquisition), argue that your severance pay should be greater, especially if it’s being treated as a “Golden Parachute Payment” which requires a 20% excise tax.
Paid Time Off (PTO) & Vacation
Be sure to account for any accrued but unpaid PTO or vacation pay in the severance agreement. Is it included or is it a separate line item in addition to your severance pay? Your employee handbook should be a good guide to determine how much PTO your company owes you.
Typically, you can receive up to 18 months of health benefits under COBRA after you’ve been terminated (29 months if you’re disabled under the law).
The catch, unless stated otherwise in the severance agreement, is that you have to pay the premiums. Include these payments as part of the severance agreement.
Smarter yet, because such employer-paid premiums are likely taxable, negotiate for a taxable lump sum payment equal to the cost of the medical coverage.
You may also just want to switch to a cheaper plan. You can also ask for other benefits like death or disability benefits to continue.
Options and Restricted Stock Units
If you work for a larger company, you might have some stock options or restricted stock units and performance shares, or units that are subject to vesting and have limitations on when they can be exercised or earned.
More often than not, the amount of equity vesting acceleration equals the cash severance. For example, nine months of cash severance is the same as nine months of accelerated vesting. If you’re being terminated in connection with a change of control of the employer, ask for greater vesting.
Also, try to do a “cashless exercise” of any vested stock options, so that no out-of-pocket cash will be required to exercise the options.
Lastly, negotiate a longer period to exercise your stock options. A lot of stock options must be exercised within 90 days of termination of employment. Request a one- or two-year extension. Again, it doesn’t hurt to ask. They can only say “no.”
We realize that some of these options only apply to people higher up in the company, but sometimes companies will offer outplacement services for free through an outside firm. If that’s not a possibility, ask the company for a cash benefit for outplacement services. Typically, we’re talking anywhere from $10,000 to $25,000.
General Release of Liability
The “general release of liability” provision is a stock CYA provision we see in nearly every severance agreement. Companies don’t want to dole out a general severance package only to turn around and get sued by the employee. Therefore, if you have a viable legal claim against the company, you have to consider this information when negotiating a severance agreement. You might have some leverage there.
The release language will be long and legalese, and try to cover “any and all liabilities, complaints, promises, causes of actions, in law or in equity, against the company and its officers, directors, shareholders, employees, subsidiaries, parent companies, affiliates, successors, and assigns.”
It often sets forth a number of specific potential claims released, including claims related to age discrimination, discrimination based on disability, violations of civil rights laws, violations of the Family and Medical Leave Act, claims for wrongful termination, and anything else the company’s lawyer can think of.
There are a number of issues that need to be addressed in connection with the typical broad release, to protect the employee:
- The release is almost always one-sided. It doesn’t have to be. Make sure it goes both ways.
- The release by the employee should exclude any claims that can’t be waived as a matter of law, any rights under the severance agreement, and any vested rights to any employment benefit plan of the company.
- The release by the employee should exclude any rights of the employee under any indemnification or advance of expenses provisions in the company’s bylaws or any employee officer or director Indemnification Agreement, or any policy of insurance maintained by or for the benefit of the company and its employees.
- The release should exclude any claims for unreimbursed travel or other business expenses.
The release will usually cover both known and unknown claims, but some states require specific language to waive unknown claims.
Companies will often insert a paragraph in the severance agreement prohibiting the departing employee from publishing or communicating to any person or entity any “disparaging” remarks, comments, or statements concerning the company. And the provision defines “disparaging” pretty broadly:
“Disparaging remarks, comments, or statement are those that impugn the character, honesty, integrity, morality, business acumen, or ability in connection with any aspect of the operation of the individual or person being disparaged.”
The best way to avoid violating this provision is to keep it vague and politically correct with the new prospective employer when (s)he is asking you why you left your last job:
“We just weren’t a good fit,” or “I’m looking for new opportunities.”
Your prospective employer knows the score and knows that you can’t say too much about your last job.
The employee should also consider asking for any non-disparagement clause to be mutual. Here is some sample language:
“The Company shall not authorize and shall take reasonable measures to prevent its current employees from making derogatory or disparaging statements regarding Employee to any third party.”
A key issue the employee will want to address will be how the company will respond to any reference checks or recommendation requests from new prospective employers. We’ve often not had much luck in mediation negotiations getting a “favorable job recommendation” as part of the settlement terms. But negotiating a severance agreement should be much less adversarial.
Try and negotiate a provision that says:
“Company acknowledges and agrees that Employee has performed well in his/her position and Company will provide a positive job recommendation to any prospective employer of Employee.”
Remember, you can also always ask for positive recommendation letters from supervisors to help you out in your new job search.
Non-Solicitation of Employees and Customers
This provision is easy to understand and will definitely sink your severance agreement if you break it. And if you breach your severance agreement, you’re looking at – not only paying back the severance pay – but possibly paying your ex-employer’s attorney fees to pursue you.
It’s simple: absolutely, under no circumstances, are you to solicit other employees to leave your old company. Even if you think you’re being sneaky and that “they’ll never find out,” just don’t do it.
Now, the upside is that these provisions normally have expiration periods of six months to a year and normally do not apply to general solicitations of employment not specifically directed to employees with whom you did not work. But, as always, get it in writing.
Your ex-boss doesn’t want you poaching his customers which makes sense.
Therefore, the employee should argue that (s)he only be prevented from using confidential customer lists from the ex-employer instead of just a general prohibition.
If it’s too broad, a court could deem the “do not solicit” provision to be nothing more than a “stealth non-compete clause.”
That said, if your ex-boss finds out that you’ve been soliciting his customers, (s)he’s going to try and find a way to come after you either way. Again, make sure that this language is as narrowly construed as possible and that it has a definite end date tied to it.
Courts do not like non-compete clauses. They tend to muck up the engines of our economy and stifle – not foster – competition. That said, they will enforce them if they’re narrowly tailored and not excessively lengthy. For instance, “shall not compete forever” is not enforceable. Or “shall not compete within a 2000-mile radius” is equally problematic.
Ask that the “competitors” be specifically named in the non-compete and try to limit the time of the clause to six months or a year at most. Remember, ex-employers feel like, because they’re paying you to leave your job, they should be able to get anything and everything they want in the process. Unfortunately for them, it doesn’t quite work that way.
How you negotiate a severance agreement should be spelled out in the initial offer letter or employment agreement that you signed when you first started. We think arbitration is typically rigged in favor of the employer, but it could, theoretically, be more cost-effective than litigation. Check your onboarding documents to see if and how severance agreements are to be negotiated.
The Unicorn – Paid Legal Fees
Yes, your ex-boss will sometimes pay the legal fees for us to review and negotiate your severance agreement. We haven’t seen one yet (they’re a bit of a unicorn), but if you’re lucky enough to have this provision in your employment contract, use it. We love this provision!
I don’t know why they would, but your company might suggest that you keep your laptop and/or smartphone as part of your severance package. Do us a favor: just don’t. Even if you have your machines “wiped,” the company is going to come after you if there’s a data breach or something else goes horribly wrong. It’s just not worth it. Do you really need that 2015 Dell laptop anyway?
Now, if it’s a company car . . .
Your ex-boss is going to want you to keep the terms of your severance package confidential for obvious reasons. However, this clause will usually exempt family members, your lawyer and his team, and the government. If your spouse is still friends with someone from your work, please make sure that (s)he is specifically instructed not to discuss the terms of your severance.
Sometimes, yes, companies get sued. Meaning all the time. And that company will want you to cooperate in the litigation process, especially if you have any knowledge that will aid in the company’s defense. Thus, the “cooperation clause.”
Try and limit the scope of said agreement as follows:
- The cooperation should be for matters that occurred within the scope and duration of your employment
- Your cooperation can’t interfere with your current job.
- You should get paid at a rate specifically determined in your severance agreement (adjusted for market inflation of course).
- You are reimbursed for out-of-pocket, legal, and travel expenses.
Now, whether or not the actual scope of your cooperation will be expanded by court order, or by agreement of counsel, remains to be seen. But at least you will have tried to keep your involvement limited – in writing.
Be sure that your severance agreement has an enforcement clause that addresses things like venue and attorney fees and costs. If it’s a national company, you don’t want to get stuck in Iowa litigating a severance agreement if you’re in Colorado. Make sure the venue is the place you plan on living. Also, make sure that it’s clear who pays attorney fees and costs and when.
As you can see, there are a million different ways a severance agreement can be negotiated. But the key takeaway here is that SEVERANCE AGREEMENTS ARE NEGOTIABLE. And it’s probably in your long-term interest to at least try.
If you need a severance agreement lawyer, don’t hesitate to call Jeff or Malissa at Marathon Law. 303-704-1222.