Your soon-to-be former employer has just provided you with a severance package. After reviewing it, you might be happy that you are about to receive money, but you have questions:
This comprehensive how-to guide will take you in detail through he different parts of your severance package so that you will better understand the agreement you are considering signing.
There is not a standard definition for severance package. The term “Severance Package” usually refers to both a severance agreement and severance pay, however it is also used to refer to either one of those individually.
A typical severance package includes both a severance agreement and severance pay. This is done to provide the employee with certain financial benefits (payments of money, medical coverage, etc.) in exchange for the employee agreeing not to sue or disparage the company.
Severance pay is usually referred to as the combination of compensation and/or benefits that is given to an employee leaves a company.
The severance agreement is the document or set of documents that you are required to sign in order to receive the severance pay. The severance agreement is usually several pages long and often contains various parts, including a release of all legal claims, confidentiality agreement, and non-disparagement agreement.
Neither the California Labor Code nor the federal Fair Labor Standards Act require employers to offer severance packages to departing employees. Instead, severance packages are provided by employers to accomplish a specific goal.
Sometimes employers offer severance packages because they are required to do so by the terms of the employment agreement with the employee. This is a rare perk that most often is provided only to high level C-suite executives (CEOs, Chief Financial Officer, Chief Marketing Office, Chief Operating Officer).
Companies that provide C-suite officers with pre-employment Severance Packages do so for several reasons. Often times the individual is highly sought after and is being recruited away from an existing lucrative job. New job offers also generally require the executive to upend his or her life and relocate his/her family to a new area.
If the new role does not work out, the pre-negotiated severance ensures the executive is compensated, to some degree, for leaving a former job and relocating to a new area.
The most common reason employers offer Severance Packages is because it wants to end its relationship with the employee—forever. Employees who have been wrongfully terminated, harassed or who have experienced wage theft can wait to sue their former employer for up to four years.
While most employees leave their employment without any legal reason to lookback and sue, providing a severance package to an outgoing employee ensures that the company can safely put away the relationship for good.
Non-competition agreements in California are invalid and unenforceable. They have been, to some degree, for more than 150 years. But employers have found ways to craft these agreements in ways that effectively keep their former employees from competing against them.
The reason most important to employers for offering severance packages is to resolve legal claims you might have against the company. Sometimes the employee is not even aware that he or she might be able to file a lawsuit against the company. By providing a severance, the company can avoid a long and costly lawsuit.
Most employees presented with a severance package wonder, what is a typical severance pay amount? It tends to be the most important part of the agreement you will consider. There is no one-size-fits-all severance amount.
You should be cautioned against comparing your severance pay amount against a formula because a good severance amount really depends on a number of factors, some of which are hard for non-lawyers to value.
Many companies offer between one and three weeks of your current pay for every year that you have been employed with the company.
Evaluating whether the severance pay amount provided is good depends on many different factors, including the size of your company, the industry in which the company works, the stage of your company (if it is a startup), the length of your employment, your position, and the reasons for your departure, and the terms the company is requesting. An experienced severance attorney will have reviewed hundreds of these agreements and will be able to help you assess whether you have been provided a fair value, given these factors.
In addition to a lump sum payment, Companies often provide COBRA continuation payments. COBRA is the law that allows employees who lose their jobs to remain on their employer-provided health plan.
Once you have been terminated, if you opt to continue your health insurance under COBRA you are responsible for paying the full insurance premium (employer and employee portion).
As part of your severance package, employers sometimes include an amount to cover reimbursement of the employer’s premium for some period of time. The reimbursement is generally in addition to the lump sum and is only available if you exercise your right to COBRA.
Many employees decide not to exercise COBRA. Sometimes a spouse has a better health insurance plan or the COBRA premiums are too expensive. Some employees try to “cash-out” the reimbursement and roll it into the lump sum.
The severance agreement is a legally binding contract between you and the Company. While no severance agreement is exactly alike, they all generally contain the following provisions.
Your severance agreement will require you to promise not to sue your former company. This portion of the agreement is contained in the “General Release of Claims” section. Often times it is the longest section of the agreement, sometimes spanning multiple pages.
The General Release is the portion where you give up your right to sue the company for any and all legal claims you might have against it. This includes, among other things, giving up the right to sue for:
One of the most important reasons to have a severance review attorney review is to make sure you are being provided a fair amount. A severance agreement attorney will be able to review the circumstances of your termination or resignation from your company to help you understand whether you have any viable legal claims that could allow you to ask for a greater amount in severance pay.
Even though your severance agreement requires you to release legal claims you have against your employer, there are certain claims that you are not legally allowed to waive:
Employers are very concerned with keeping severance negotiations secret. While the fact that your employer provides a severance is likely not a secret, the amount it pays you is highly confidential. To prevent other employees from learning how much severance the company provides to employees, the company will require you to sign a confidentiality agreement as part of your severance package.
Some confidentiality agreements are narrow and only require you to keep the terms (the amount and language of the agreement) confidential. Others are very broad and prohibit you from disclosing to anyone (including immediate family members) the amount, terms, existence and even any negotiations leading up to your severance agreement.
Employers are increasingly concerned about their reputations, especially online. They want to avoid negative reviews on websites like Glassdoor, Yelp and LinkedIn. To do so, they often include a non-disparagement provision.
The non-disparagement clause protects the company from these types of negative reviews by prohibiting you disparaging or criticizing the company, its employees, its products and services.
Like confidentiality agreements, non-disparagement agreements can be drafted narrowly or broadly. Broad non-disparagement clauses are vague and unclear about what you may and may not say, to whom, and in what manner.
Because your employer is almost always the one benefiting from the one-sided non-disparagement agreement, you should carefully scrutinize what it is that you will be required to do.
What is not in your severance agreement can be just as important as what is in your severance agreement. The following are terms that you might not find in your agreement, but which are important to consider before signing.
Most non-disparagement agreements are one-sided. That means that while you are prohibited from making critical comments about the Company, the Company is not prohibited from doing the same to you.
There are certain circumstances where you should consider making the non-disparagement agreement mutual—that means prohibiting the Company from making critical comments about you. This protects you from the Company disparaging you to former co-workers, or more importantly, future employers.
You might consider seeking a mutual non-disparagement agreement if:Sometimes employers provide a sign-on bonus as part of their employment offer. Many sign-on bonuses are subject to a clawback. The clawback provision of the agreement usually states that in the event the employee is terminated or resigns within a certain period of time, the employee must pay back either the full amount or pro rata share of the sign-on bonus.
If the sign-on bonus clawback is not explicitly addressed in your severance agreement, you will be legally obligated to pay back your bonus. This can have significant unforeseen tax consequences.
Acme pays Owen an upfront $5,000 sign-on bonus that is subject to a one-year clawback if the employee leaves the company. That $5,000 is taxable income and the Owen will have to pay taxes on that amount. If Owen leaves the company, he might be forced to pay back the full $5,000 to the company after having already paid taxes on the amount.
Severance attorneys can help negotiate more favorable bonus clawbacks.
Non-compete agreements are almost always unenforceable in California. There are two cases, however, when a non-compete will be enforceable. The first is if you are an owner-employee and sell all of your ownership interest. In this case, your company can make you sign a non-compete the applies to a specific geographic area where the business was sold. However, the definition of which owner-employees who are subject to this exception is narrow.
It only applies to employees who are:In addition, you have to own more than just stock in the company. The ownership in the company must be one of the following:
The second situation in which your non-compete will be enforceable is if the Choice of Law provision in your severance agreement provides that the law of a different state—a state that enforces non-compete agreements—applies.
A Choice of Law provision is a common feature of a contract. If there is a dispute, it tells a court which state’s law should apply. While most California employment agreements are subject to California state law, some companies, with offices outside of California, want to have their employment contracts interpreted under out-of-state laws that are more favorable to employers.
Generally, your company cannot force you to agree to have your contract interpreted under some other state’s law. However, you are allowed to agree to this if you are individually represented by an attorney in negotiating the terms of your severance agreement.
Unemployment Insurance provides wage replacement to workers who have been terminated or laid off from their jobs. However, as long as you are receiving wages, you are not considered unemployed. The EDD, which administers unemployment insurance has stated that severance pay is not considered wages.
In order for the payment to be considered severance wages, it must meet the following requirements:If you are involved in a worker’s compensation claim or you are contemplating filing one, your employer cannot require you to waive away your rights to file a worker’s compensation claim.
The separation date is often overlooked as just a mere formality. But the date is important because it can affect equity grants you received during your employment.
Companies commonly grant restricted stock units (RSUs) or stock options. RSUs or options vest according to a vesting schedule set out in your offer letter. Vesting normally occurs over a four- year period with the first 25% vesting after the first year with the remaining equity vesting on a pro rata quarterly or monthly basis.
If your separation date occurs before the next vesting period, you are not entitled to unvested RSUs or options for work done prior to the vesting date.
Luke is scheduled to vest 1000 RSUs on December 1. However, on November 25, he is terminated for poor performance. Because Luke was not employed on the date of his vesting, he forfeited any right to the those RSUs. You are not entitled to a portion of those unvested RSUs.
One exception to this rule if the company terminates you on the eve of your vesting date to prevent your equity from vesting. If this happened, you could file a lawsuit against your company for breach of the covenant of good faith and fair dealing which requires all parties to a contract to act in good faith.
A stock option is the right to buy your company’s stock. During the course of your employment, you might have “vested” options. Unlike RSUs that provide you immediate stock in the company once they have vested, the option gives you the right to buy stock in the company at a specified “exercise price,” usually an amount below the market value.
However, once your employment has ended, the time for exercising your options shortens dramatically. You generally have 90 days from the date of your separation to exercise your options. Your employer may have a policy that is stricter and reduces this time period to something shorter.
If you fail to exercise your options within the required time period, they will expire and you will no longer have the right to buy the company stock at the exercise price which is often below the market value at the time you are required to exercise your options.
You do not need a lawyer to negotiate your severance package. (Disclaimer: we always advise to consult with an attorney when considering signing important legal documents like a severance agreement)
The most common reasons you might not get an attorney include:Your employer needs to have a good reason to negotiate with you about the pay and terms of your severance package. While you may be able to negotiate a nominal increase, your ability to negotiate significant increases in pay or changes to terms on your own is likely reduced significantly because of the following reasons:
First you must identify a compelling reason the company should provide you with a better severance. The most compelling reasons are ones that could affect its bottom line, such as:
You should be aware of the risks, however, of negotiating your own severance. One risk is that you will fail to understand the true value of any potential case you have against the company. If you undervalue your legal claims you risk leaving money on the table by failing to ask for enough. On the other hand, if you overvalue your claims and ask for too much, you risk the company refusing to negotiate.
The other risk you face when negotiating you own severance packages is the possibility of making missteps or misstatements. Consider the real-life example of an employee who decided to negotiate her own severance:
“Jennifer” worked at a fortune 500 company. Her manager had retaliated against her after she reported to the manager’s supervisor that he was committing fraud against one of the company’s customers.
The company offered Jennifer a severance package with a confidentiality agreement. Unsatisfied, Jennifer attempted to negotiate a better package. During the negotiation, she disclosed information that weakened her bargaining position. She was forced to settle for a severance package that was significantly less than what she could have received.
If you are serious about maximizing your opportunity for a better severance package, you should consider hiring an experienced severance attorney to review your severance agreement, evaluate your employment history and help you negotiate your severance package.
An attorney with experience negotiating severance packages will know what information is important to highlight and emphasize. They will also know the best way to position you during a negotiation. An attorney with experience negotiating these types of agreements should be able to:
If you are not an attorney, you likely have no way to properly evaluate and value any potential legal claims you have against the Company. Often times, this is the source of the greatest leverage in negotiating a severance. In this sense, the attorney can act as an “appraiser” to help you understand what the full value of your legal claims are.
“Andrea” was terminated by her company with no notice. During the course of our conversation, it became clear that Andrea was mischaracterized as an exempt employee and had not been paid overtime.
Based on our analysis and calculations, we were able to determine that Andrea was owed more than $200,000. Knowing that she had strong legal claims to go back to the company with, Andrea was able to negotiate a better severance package.
If you decide to hire an attorney to help you review or negotiate your severance package, you should find an attorney that can do more than just read the contract and explain what is in it. Most attorneys are capable of doing that.
You want an attorney that can evaluate your case for its true value, taking into consideration what happened to you during your employment (unpaid wages, retaliation, harassment), someone who has experience litigating these types of cases so they understand the company’s pain points and the true cost of not settling, and someone who will advocate for you in light of what your personal goals are.
No one wants to spend money on an attorney unnecessarily. So your attorney should be able to add real value, whether that means giving you the peace of mind to know that you have been provided a good severance package or being able to help you negotiate a better package.
If you have not provided enough information to the attorney, you should be wary of any attorney that commits to do this. The fact is that sometimes hiring an attorney to negotiate with your company directly is actually counter-productive. It can slow down the process, add little value and just cost you money.
The purpose of these questions is to help you evaluate whether the attorney will be a good fit for you. Your relationship with an attorney is no different than your relationship with any other any other person. Sometimes an attorney and a potential client are not a good fit. After speaking with the attorney, consider the following questions:
