If you are faced with a layoff or termination from your employment, it’s important to understand the severance pay and severance agreements that may be available to you. This article provides answers to common questions about severance pay and agreements related to employment termination.
What is Severance Pay?
Severance pay is monetary compensation that is provided to employees who are laid off or terminated from their employment. The compensation can take various forms, including a lump sum payment (such as three months’ salary), a continuation of salary for a defined period, and/or continued payment of health or COBRA benefits for a period of time.
What is a Severance Agreement?
To be eligible for severance pay and benefits, an employee is typically required to sign an agreement that outlines the terms of the compensation offered and includes a general release of any claims against the employer. A severance agreement is a contract that is negotiated between the employer and employee.
Is Severance Pay Required by Law?
Most laws do not require employers to provide severance pay or severance packages to employees who are terminated from their employment. However, certain companies are subject to the Worker Adjustment and Retraining Notification (WARN) Act, which dictates a 60-day notice or pay on termination. Many employers have severance pay policies outlined in their employee handbooks, and some choose to offer severance pay to mitigate negative publicity or potential litigation.
How is Severance Pay Calculated?
Employers typically calculate severance pay based on one of the following methods: a lump sum payment of one to four months (or more for senior level executives), a formula based on length of employment (such as one or two weeks of pay for every year worked), or payment for COBRA benefits for three to six months (or more for senior executives).
Are Severance Agreements Negotiable?
Severance agreements presented by employers are generally one-sided and favor the employer, so it’s important to review the agreement with an employment lawyer. However, the agreement is negotiable assuming the employee has leverage or the company is willing to negotiate. Some companies that lay off many employees may be hesitant to negotiate due to administrative difficulties and potential liability.
What is Typically Included in a Severance Agreement?
A severance agreement generally includes the following clauses:
-Date of termination of employment
-Waiver and release of claims from the employee against the employer, except for certain non-waivable claims
-Covenant by the employee not to sue the employer on any released claim
-Amount of severance pay
-Whether employee receives any continuing health or COBRA benefits
-How stock options or other equity grants are treated
-Scope of any expense reimbursements
-Agreement by the employee to return all company property
-An acknowledgement by the company that the employee will keep all non-public information about the company confidential
-Dispute resolution clause
-Sometimes a non-compete covenant
-Sometimes a non-disparagement clause
-Sometimes a prohibition against soliciting employees or customers of the employer
What is a Waiver and Release of Claims?
The main purpose of a severance agreement is for the employee to waive and release any claims they may have against the employer. The release clause includes a list of possible claims, such as breach of employment agreement, wrongful termination, discrimination, and harassment. Negotiating the release is generally difficult, but certain items may be excluded, such as rights to vested stock options and other equity grants, vested rights under retirement plans, and rights that are not waivable as a matter of law.
What Should I be Asking for in a Severance Agreement?
When negotiating a severance agreement, it’s important to focus on items that hold the most value, such as:
-A higher amount of severance pay
-Payment in a lump sum rather than installments
-Payment of COBRA benefits for at least six months
-Accelerated vesting of unvested stock options or equity grants
-An extended period to exercise stock options
-Right of “cashless” stock option exercise
-A mutual release of claims
-Payment of any partially accrued bonus or commission
-Payment for career outplacement or counseling services
-Statement of eligibility for future rehire
-How reference checks from future employers will be handled
-Possibility of continuing to work as an independent contractor for a transition period
How Can I Deal with the Issue of Reference Checks?
It’s important to address how the company will respond to reference checks or recommendation requests from future employers. You may request a statement in the severance agreement that states the company will provide a positive recommendation to any interested new employers. However, many employers will only confirm dates of employment and job title. It’s important to explore your options for obtaining favorable references, such as seeking recommendations from former colleagues or supervisors.
