3 Most Common Questions Executives Have About Severance Agreements
The second half of 2022 has been a tough time for many workers and job seekers.
As inflation climbs and recession looms, even the biggest names in tech, media, and finance have been unable to escape the slashed budgets and waves of downsizing that come with economic contraction.
In the past six months, even more top- and mid-level executives find themselves wondering about the part of the employment contract you hope you never have to get to know: the severance agreement.
Let’s review the top three questions we hear most frequently from executives about severance.
We’ll walk you through who is and isn’t entitled to a severance agreement, cover what benefits packages typically contain, and explain how to get more out of your company’s offer.
When Can I Expect To Receive a Severance Package?
A severance package, also referred to as a severance agreement or separation agreement, is a set of benefits extended to an employee whose job has ended typically for reasons beyond their control, like layoffs due to restructuring or downsizing.
Severance is designed to ease an employee’s transition out of the company, offering financial and other support as they search for a new position.
Most employees don’t realize it’s also a quid pro quo exchange: a severance offer is a legal contract, a detailed agreement made between two parties (you and your employer) that involves obligations on both ends.
Your employer offers you a set of benefits — monetary payment, health care coverage, stock options etc. In exchange, you agree to depart quietly, waive your rights to sue them, and promise not to disclose certain confidential information or trade secrets.
So make no mistake: severance isn’t a gift or guarantee. You also shouldn’t expect to receive any benefits if you voluntarily resign or are terminated “for cause”: meaning you’re fired because of something like a criminal conviction, gross negligence, or actions that damage the company’s reputation.
Only those who have explicit severance agreements written into an employment contract or collective bargaining agreement are entitled to benefits upon unexpected termination.
And if you sign it, you’re legally bound to the terms of the contract, meaning you may permanently waive your rights to sue your former employer.
What Benefits Should My Severance Package Include?
Let’s clear up a common misconception: there’s no set formula or official law dictating how much money a severance package should pay out. (Remember: workers generally have no legal entitlement to severance.)
Policies for determining monetary compensation or other benefits offered vary from company to company.
Here are some of the most common benefits included in severance agreements:
Although there’s no legal standard for determining the amount of severance pay, monetary benefits typically break down to your salary paid out over a period of time.
Companies often calculate this in terms of the weeks or months of salary. For example, an agreement might grant you payment according to your salary for up to three months after your last day of work.
This payment can be made either in installments or in a lump sum. Your employer may also have their own formula for calculating the monetary portion of your severance package, which might also take into account your position in the company or your years of service.
Federal law requires your employer to offer you health insurance for 18 months after your departure at your former corporate rate.
These are called COBRA benefits, after the 1985 Consolidated Omnibus Budget Reconciliation Act. So, if you received health benefits for $800 a month previously, under COBRA you’re entitled to this same rate for the next 18 months.
Money Owed Independent of Severance Pay
Any previously promised compensation could also be included as a separate payout: for example, unpaid commissions, bonuses, reimbursed business expenses, unused vacation days, or personal/sick time.
Other Financial Benefits: Pension, Profit Sharing, 401(k), Loan Repayments, Stock Options
Departing employees usually have 90 days to exercise their vested stock options before they expire. You can also request an extension to this 90-day period in your severance agreement.
Connection to programs or agencies offering assistance in a future job search has also become common severance package benefits.
Services can include guidance in resume writing or editing, interview preparation, or targeted company searches.
Beyond these benefits, your agreement could also contain other information important for the next steps in your career: your official termination date, the reason for termination, and/or a reference letter from your former employer.
How Do I Get More Money Out of My Severance Offer?
Severance agreements are negotiable, and you can always treat the package in front of you as just an offer — one that you don’t have to accept as is.
But how much you can negotiate to your benefit depends largely on how much leverage you have, and to significantly improve your offer, you’ll need a lot of leverage.
But I have seen executives make substantial improvements just by asking for more. Obviously, leverage helps, and leverage comes in many forms.
Often the most powerful leverage is based on relationships, or sometimes it’s the threat of a wrongful termination claim or some other illegal conduct in the workplace.
For instance, if your departure was linked to:
- A complaint of sexual harassment,
- Being pregnant,
- Having a serious illness,
- Serving jury duty,
- Taking Family Medical Leave,
- Withheld overtime payment,
- Whistleblower complaints, or
- or some kind of discrimination (gender, race, religion, national origin, sexual orientation, disability, age if you’re over 40)
If one of these cases applies, you may have grounds for a lawsuit and thus have the leverage needed to negotiate a substantial increase in your severance package.
If not, you can still negotiate, but you’ll need to be more strategic. You can make a case for supplementing your existing benefits based on your tenure and/or performance as an employee.
Offer examples of the value you added to the organization with your time and skills, or point to the financial or personal difficulties associated with making the transition to a new job.
Without the leverage of a claim of wrongful termination, you’re less likely to see a major change in your overall severance pay. But you can, for example, ask for improvement in other appreciable areas:
- Extended health benefit payments
- Agreements not to contest unemployment benefits
- Acceleration of unvested stock options
- Cash payout of the value of outplacement services or unused vacation days
Negotiating a severance package alone can be difficult. Beyond the diplomatic challenge of increasing your benefits, you’ll also be navigating the obligations your former boss requires on your end.
You may find yourself facing restrictive covenants like non-compete agreements or non-solicitation clauses that can impact your next job search.
Contact an Employment Lawyer Today
To be sure you’re getting the most out of your benefits and not saddling yourself with unexpected restrictions, consult with an employment attorney before negotiating or signing your employer’s severance offer.
An experienced employment law attorney can guide you in understanding the terms of the agreement, diplomatically negotiating an offer, and assessing a claim of wrongful termination.
If you’re facing a severance agreement in California or New York, reach out to Ottinger Employment Lawyers today to discuss the details of your case.