Severance Packages – Key Points for Every Agreement

A severance package is designed to ease your transition out of the company. Your employer wants to make sure you leave quietly and you want to obtain a cushion to hold yourself over until you find a new job.

The points below are important to anyone trying to evaluate a severance offer.  If you need assistance, contact our lawyers today.

1. Understand the Quid Pro Quo of the Severance Package

The quid pro quo of a contract is the heart of the deal – the exchange of value. In reviewing your severance package, you need to understand what you are getting and what you are giving up. In most severance packages, you will be receiving a payment of money, possibly some health care coverage, stock options, and other things of value in exchange for your promise to leave the company and waive your right to sue them for anything or say anything bad about them. That is usually the quid pro quo of a severance package. Make sure you understand exactly what you are getting and what you are giving up.

2. The Money

Most every severance package contains a promise to pay money. Typically, the money is paid out as salary over a period of time. For example, your severance package might say that you will receive your salary for three months after your last day in the office. The money component of a severance package is almost always discussed in terms or weeks or months of a person’s salary. Be sure to check your agreement so you understand how much money is being paid to you. Remember, you can always ask for more money. If your severance package states that you will receive three additional months of salary after you leave, you can always ask them to increase the offer from three months to six months. You don’t need a reason for asking for more. But if the company asks why you want more money, you can say that you need more because you expect that it will take you more time to find a job.

3. Health Benefits in a Severance Package

Your employer will be required to offer you COBRA benefits. COBRA refers to federal law (Consolidated Omnibus Budget Reconciliation Act of 1985) that requires companies to offer health insurance to terminated employees for 18 months at the corporate rate.

For example, if you currently receive health benefits that cost $750 a month through your employer, your company is required under COBRA to offer this same health insurance policy to you at the same price of $750 a month for 18 months.

Many severance packages include an offer to make your COBRA payments for a period of time or simply continue your existing health benefits for a period of time and defer the start of the COBRA period.

Check your severance package to see if your company has offered to either extend your health benefits or make any of your COBRA payments.

Remember that you can ask your employer to help make these payments for you as part of the severance package.

4. Unemployment Benefits

If you are about to lose your job, you are probably very interested in obtaining unemployment benefits. Typically, a person is only entitled to unemployment benefits if they are laid off due to a lack of work. A person who is terminated for cause or quits is not entitled to benefits. It is not uncommon for companies to challenge a former employee’s request for unemployment benefits on the ground that the employee was fired for cause or poor performance. You can make sure this does not happen to you by including the right language in your severance package. Obtain an agreement that your employer will not contest your right to unemployment benefits. In order to do this, add a sentence to your agreement with language similar to this: “It is agreed that [You] had been laid off for lack of work (or restructuring or downsizing etc…) and that [You] is entitled to receive unemployment benefits and X Company agrees that it will not contest any claim for unemployment benefits requested by [You].

5. Exercise Your Vested Stock Options

If you were provided stock options, make sure you have an opportunity to exercise them. Typically a departing employee will have 90 days to exercise vested stock options before they expire. But make sure this is clearly stated in your severance package and you can ask to extend the 90-day period.

6. Accelerate the Vesting Schedule for Unvested Options or Equity Grants

Executive compensation often comes in the form of unvested stock or options. For example, a company may offer an executive 300 shares of company stock and the shares will vest over three years. If you have unvested equity or options, you can ask your company accelerate the vesting date so they vest before you leave the company.

7. Convert Outplace Services into Cash

Companies often offer outplace services to departing employees. If you don’t feel that the outplacement service will provide a benefit, then ask your company to provide you with the cash value of these services.

8. Vacation Pay

Some companies allow an employee’s unused vacation time to accrue over time. Check your company policy manual or ask a human resources representative about this and if your have accrued vacation time, ask to have it paid in cash or ask to stay on the company payroll until the vacation time is used up.

9. Determine Why You Were Let Go

You may have leverage to negotiate a much better severance package if your employment was terminated illegally. Your termination may be illegal if you were let go for any of the following reasons: age if you are over 40, gender, race, religion, national origin, sexual orientation, disability or serious illness, sick family members, pregnancy, jury service, or for complaining about sex harassment, employment discrimination or failure to pay overtime. If any of these factors are at play, you may have grounds to substantially increase your severance package. If you sign your severance agreement, you will waive your rights permanently. If you believe that you were unlawfully terminated, you should consider contacting an employment lawyer.

If you need assistance with a severance package,  please call us at NY: 347-492-1904 or SF: 415-508-7786 or contact us online.

Author Photo

Robert Ottinger, Esq.

Robert Ottinger is an employment attorney who focuses on representing executives and employees in employment disputes. Before starting his firm, Robert slugged it out in courtrooms trying cases for the government. Robert served as a Deputy Attorney General for the California Department of Justice in Los Angeles and then as Assistant Attorney General for the New York Attorney General’s Office in Manhattan.

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