What to consider when offered a severance package?
Losing a job can be a difficult experience with the sudden loss of income and uncertainty of finding a new position elsewhere. Being provided a severance agreement can add another layer of stress to an already stressful situation. Businesses have a variety of reasons for offering severances agreements—some legitimate and some illegitimate or even illegal. It is important to consider why you are being offered the agreement and what conditions are tied to accepting the severance agreement.
Here are some tips to consider when offered with a severance agreement:
What is a severance package?
Although there is not a standard definition as to what makes up a severance package, a “severance package” typically includes a severance agreement and severance pay. Often the terms severance package, severance agreement or simply severance are used interchangeably. A typical severance agreement outlines the terms of the agreement where the employer provides certain financial benefits in exchange for the employee agreeing not to sue the employer along with agreeing to other terms. The financial benefits or “severance pay” usually include a combination of pay and/or benefits (payment of money, medical coverage, etc.).
Why do employers offer severance package?
Generally, employers are not required to offer a severance package to employees they are laying off or terminating from employment. Employers may be obligated to provide a severance under limited circumstances such as, for example, a union may have a requirement for a severance agreement in their bargaining agreements with employers or a high-level executive or salaried employee may have an employment contract requiring a severance. Even if an employer is not required to provide a severance agreement, they may do so for a variety of reasons. Some employers may have an internal policy to offer severance packages to employees with many years of service. Others may be using the severance package to entice an employee to sign an agreement that restricts their rights. For example, the agreement may waive an employee’s rights to pursue legal claims against the employer or the severance agreement may include a non-compete provision.
What is in a typical severance agreement?
The severance agreement is a legal contract between the employer and the departing employee. In exchange for the severance pay, the employee is agreeing to the terms of the agreement. Although severance agreements may not all be the same, they generally include the following terms.
- General Release of Claims
A severance agreement will require an employee to promise not to sue their former employer. This is contained in a general release of claims section of the agreement. This is usually the longest section and sets forth that the employee is giving up their rights to sue for all manner of things including unpaid wages (failure to pay minimum wage, overtime, bonuses, commissions, etc.), discrimination (race, disability, religion, gender, national origin, sexual orientation, etc.), harassment (sexual harassment, etc.), retaliation, wrongful termination, defamation, and any other legally releasable claim as part of the general release of all claims. Of course, there are some claims that cannot be released under the law including future claims or your right to report certain illegal activity.
- Non-disparagement Provision
A non-disparagement agreement prohibits the employee from talking negatively about the company, their product or service, and/or certain management or other employees. A non-disparagement provision can be overly broad and ambiguous as to what you can or cannot say. Typically, the employer will make such a provision one-sided so that it only applies to the employee.
- Other Provisions
Of course, the severance agreement may contain other terms that need to be reviewed carefully and understood before the employee signs the agreement. Some of these terms are addressed in the next section.
What should you be wary of in a severance package?
Not every severance agreement looks the same and the employee needs to make sure they thoroughly review the severance agreement and understand the terms before agreeing to anything. In addition to potentially waiving your rights to sue, the agreement may contain (or not contain) other terms that you need to be wary of and consider before signing, such as the following.
- One-sided non-disparagement, confidentiality or release provisions
Oftentimes the non-disparagement provision is one-sided and only benefits the employer. This can sometimes be negotiated to make the provision apply to the employer or at least make sure it is narrowly drafted and clear. Similarly, there may be some circumstances where an employee would like to make other provisions, such as confidentiality or the release of claims, mutually applicable to the employer in addition to the employee.
- Clawback provisions for sign-on bonuses, relocation expenses, tuition reimbursement or other similar benefits
Employers sometimes provide certain “sign-on” benefits as part of the offer of employment to an employee. These benefits may include a sign-on bonus, relocation expenses, or tuition reimbursement. Often these benefits may include a clawback provision that requires the employee to pay back some or all of the amount if the employee is terminated or resigns within a certain time period. If the severance agreement is silent on such a provision or it is not explicitly addressed, then the employee may legally be obliged to pay back the benefit.
- No rehire or no reapply provisions
The severance agreement may include a no rehire or no reapply provision that require the employee agree to not reapply to the employer or be hire by the employer in the future. This term is fairly standard in severance agreements where there may have been some dispute between the employee and employer.
- Non-compete or non-solicitation provisions
The employer may use the severance package as a way to entice the employee into agreeing to a non-compete or non-solicitation agreement as part of the severance agreement. This can severely prohibit an employee’s ability to find work with another employer for a period of time (usually 2 years or less) and within a certain geographic region. An employee should strongly consider the negative implications such an agreement may have on them or their ability to find work before signing the severance agreement.
When should you consider consulting with an attorney?
While you may not need a lawyer to negotiate a severance agreement, we strongly recommend an employee consult an attorney before signing a settlement agreement. The employee may not want to seek an attorney for a variety of reasons such as they do not want to pay to consult with an attorney, they are ok with the amount of pay and benefits being offered, they do not have any concerns or questions about the agreement, they are not concerned about giving up their rights to sue, they are not concerned about any non-disparagement, non-compete or other provisions, they do not have any questions about the agreement, or they simply want to move past the termination.
However, an employee should consider consulting with an attorney regarding the severance package if they have any questions, concerns, or want to otherwise negotiate the terms or amount of benefits with the employer. Here are some situations where an employee may want to consider consulting with an attorney.
- You are unhappy with the amount of benefits.
- You have questions or concerns about the provisions of the agreement such as the non-compete or non-disparagement.
- You had a dispute with your employer or you are concerned about releasing legitimate claims.
Employers may be unwilling to negotiate the terms of a severance package without good reason. An attorney can help you understand the agreement and whether there is good cause to demand an increase in benefits. For example, a lawyer may be able to identify if you have a potential claim against the employer and use this to negotiate a much better severance than the employee was offered or would be able to negotiate themselves. Employers may not take the employee seriously, even with a threat of a possible lawsuit, unless the employee is represented by an attorney.
Our firm practices almost exclusively in employment law and we have attorneys willing to consult with you and review your severance package.
- Jay Babb