The Basics of Severance Agreements
Severance agreements are contracts between an employer and a terminated employee that typically provide for some sort of payment to the employee in exchange for a release of claims against the employer. In most cases, the agreement will allow the employer to avoid a lawsuit if the employee has signed the agreement. Furthermore, the agreement may include other inducements, which you’ll need an attorney to help you review. These can include: non-disparagement provisions, confidentiality provisions, agreements to not solicit employees, non-compete agreements, and return of property agreements .
Sometimes it is expected for an employee to sign a severance agreement, like when leaving a corporate or white-collar job, however severance pay is considered special pay and, as a general rule, is not given to all employees. Companies are under no obligation to give employees severance pay and it is typically at the company’s discretion to provide severance pay or not, as well as the amount.
A severance agreement is used to protect the company after termination. Requiring a written agreement is not required by federal law, although most severance plans do require it.
Reasons to Have a Lawyer Review your Severance Agreement
Your Severance Package Will Likely Be Better – Every time a severance agreement is offered it has a reasonable starting point for the employee. However, as a lawyer who represents employees in negotiating severance packages all the time, I see firsthand the impact a good negotiator can have on determining what that package starts as and what it ends as. While you may not always get what you want, getting an attorney to negotiate for you will usually give you more than you would have without one. Here are some common protections that attorneys ask for in severance agreements: Your Rights Will Be Protected – In the situation where the contract is offered by a big company that has form contracts, an attorney will know how to analyze language in contracts that are usually boilerplate for the company offering it, but that are not necessarily fair to the employee. An attorney will know how the law typically interprets a contract and how unfair terms will be viewed by a judge if litigation is later required. Some examples of common clauses that are typically included but are not always fair to employees are non-compete, non-solicitation, and non-disparagement clauses. These clauses are designed to limit the former employee from later exploiting the company’s confidential information for the benefit of a competitor. You Will Comply With The IRS (and not pay more taxes than you need to) – Depending on how you receive your severance, you may not be taxed at the appropriate level. The IRS requires withholding and reporting of Federal Insurance Contributions Act (FICA) taxes, which are the Social Security and Medicare taxes. These taxes are in addition to federal income tax and are assessed on all forms of compensation. Wages are also considered qualified retirement plan contributions subject to income tax and FICA taxes (Social Security and Medicare taxes) if you received cash. But sections 401(k), 403(b), 457, SIMPLE, or governmental section 457 plans.
Common Pitfalls of Severance Agreements
Noncompete Agreements. Many severance agreements contain fairly standard noncompetition language, for a six or twelve month period, prohibiting the beneficiary of the agreement from competing with the corporation. This in itself might not be particularly troublesome. However, it is not uncommon for employers to try to invoke their noncompete rights when the employee is no longer with the company. For example, an employer might attempt to enforce a noncompetition agreement against a former employee who has started his or her own business or simply begun working for a competitor. Often, what the employer has failed to recognize is that its contract with the former employee was signed years ago, as part of its initial employment. Given this significant time lapse, as well as changes in the former employee’s industry and position, it may well be that there is no rational reason for the employer to bother attempting to enforce a noncompete.
Furthermore, the employer may be bound by the doctrine known as "laches" to surrender its claim. Laches means that the former employer may be forced to forfeit its otherwise valid contract right simply because it waited too long.
Confidentiality Agreements. Many employers have confidentiality agreements, often with some of their key employees. These agreements are usually less troublesome than the noncompetition clauses, since employees generally appreciate the need for confidentiality. However, almost no one, not even a highly compensated employee in the sales department, appreciates the potential obligation of keeping the employer’s financial statements confidential, if he or she no longer works for the employer. Even more troublesome are non-solicitation clauses, where the former employee is asked to agree not to solicit the employer’s customers. Again, while appropriate in certain limited circumstances, the enforceability of such provisions is limited where the employee’s severance agreement is several years after the initial employment agreement.
Again, an attorney can be of great assistance in negotiating these types of provisions.
Selecting the Appropriate Lawyer for You
When faced with the prospect of a severance agreement , you may wonder who could help you review the document. You should seek an attorney with significant experience in reviewing severance agreements and negotiating severance benefits. Consider these questions when asking potential attorneys to assist you in reviewing a severance agreement:
What is your experience reviewing and negotiating severance agreements?
How long have you been representing individuals in their negotiations with employers?
Do you have experience in our particular industry?
Do you have experience in negotiating the type of compensation we are discussing?
Have you negotiated a similar severance agreement before?
What are your fees? Are there any additional costs or up-front payments required?
Will you represent us if the issue is not resolved without litigation?
What to Expect During the Review Process
After you come to our initial consultation and hire our firm to handle your matter, or you send our firm your severance agreement to review independently, an attorney from our firm will reach out to schedule a time with you to review your severance agreement. In most instances, you can accomplish the review in person at our office, on the phone or via Skype if you are located out of state, but this is not a requirement.
Once a time for review is set, we will set aside between 15 to 30 minutes for an initial review and discuss the critical components of your severance agreement with you. Depending on the complexity of your agreement and your needs (review, simple negotiation, or immediate legal action, for example), the entire process should take between 30 and 60 minutes. Some reviews take less time and some require more, but this is the general rule of thumb.
We will let you know how much the review will cost at the initial consultation, or upon scheduling your review. An attorney may review your severance agreement right there with you or may need to take it back to the office to further review before sharing their thoughts with you. This depends on the circumstances of your case and some firms have a flat rate for severance packages that comes down to under $100 for up to an hour’s worth of work. At this point, you should expect a bill for the cost of the review and to go over what the next steps will be depending on your needs (negotiation, lawsuit, etc.).
Hypothetical Scenarios Where a Lawyer Can Help
Consider the situation of "Mark," a 35-year-old manager with two children. Mark worked for a large multi-national company where he spent his entire adult life. After the company began significant layoffs, Mark was anxiously wondering whether he was next to go. For a couple of months Mark was in the clear and then he was called into Human Resources and told his job was being eliminated. The company offered Mark severance equal to one year of salary and a two-year extension of his health insurance coverage. Mark was ecstatic but somewhat disappointed the severance was not larger. When he was offered the severance package he was also informed that he could not work for a competitor for one year. Mark was not initially concerned with that restriction because he did not plan to work for a competitor.
The following week Mark’s wife, who was also a manager at the same company , was also notified that her position was being eliminated. They were both so grateful that they had received one year severance and health coverage that they did not spend much time reading or understanding the restrictive covenants. After being unemployed for a few months Mark found a similar position but with a competitor for a similar compensation. When Mark began working at the competitor he was approached by a human resources employee who informed him that he could not continue working at the competitor because of the one-year concurring employment restrictions. Mark was devastated. He and his spouse had worked their entire adult lives for that company and now they could not find work for an entire year. If Mark had taken time to have his severance agreement reviewed by an attorney he would have understood that he had no choice but to take the offer even though it was not what he wanted.
Consider the situation of Antonia who is 44 years old and four children. Antonia is a sales manager for a large chemical manufacturer. Antonia was recruited by this company from a competitor nearly twenty years ago and had been very successful. Like many young professionals she did not bother getting her severance agreement reviewed before she signed it. Antonia know knew better but by then it was too late.
Five years ago Antonia was still the same dedicated and high performing employee. The company signed a joint venture and as a result of the merger imposed significant new sale quotas that were difficult if not impossible to meet. The company terminated nearly 300 employees after the merger. Like many companies today the company offered early retirement to many employees who were near retirement age. Unfortunately, Antonia was not eligible for early retirement. She was so dedicated to this employer that her performance reviews were phenomenal. Immediately after the merger Antonia was notified that she was laid off. The company offered Antonia one year of severance and the ability to extend her health insurance coverage for one year. One of the more troubling aspects of the offer was a two-year post-employment non-competitor provision that would prevent Antonia from seeking employment with a competitor for two years. Antonia was devastated and so was her spouse. They both had children in college. If Antonia accepted the severance offer and waited two years to work for a competitor they would lose their house. When asked why they had not consulted with an attorney Antonia stated that they were so grateful for the severance package that they never considered consulting an attorney.