Severance Agreements — Your Wrongful Termination Case For Sale
One of the frequent services I perform for employees who are laid off, or occasionally even those fired, is to review a severance agreement handed to them at the time of termination. I’ve seen hundreds of these agreements, and they tend to follow a pattern. I trace and discuss the standard severance terms in this article.
Clients who have taken the Agreement home to consider it before signing call me because they want to know they are not releasing important rights having real value for a fraction of what their case might be worth. That’s a very reasonable and prudent step, and I usually charge only a small fee to review the document because I am looking at the bigger picture of the prospective client’s case value.
The practical reality is that your ability to change the terms of a boilerplate severance agreement crafted by the employer is entirely linked to the threat to the employer that you will sue on meritorious claims. What they are “giving” is really better framed a question: “What are they buying?” They want to buy a “general release of all claims” and making the first bid. The severance agreement basically creates the following options: take it, reject it, or counter it. This decision depends on an accurate assessment of the value of a potential wrongful lay-off, wrongful termination, defamation, harassment, discrimination, whistleblower retaliation, or other legal wrong committed during your employment. If they’re buying, you’re selling, and you need an accurate idea of what your selling in order to arrive at a fair price. To get that idea, you may need legal advice, and quickly, as the severance agreement usually has a timeline for acceptance.
And here’s the problem: You have no idea if you’ve been legally wronged by the termination of employment. You have an idea that something may have been unfair in the process, but is that unfairness illegal? Or, you may have no clear conviction that you’ve been selected for lay-off or firing because of discrimination, but the thought lingers, “It could be.”
Of course, the Agreements are very one sided because drafted by employer attorneys for the benefit of the employer. The employee basically receives one material benefit: a payment of money. But the employer is looking for much more, including a promise that the employee will not be suing for wrongful lay-off or wrongful termination. Here are some of the provisions that recur in these employer drafted agreements:
Severance Agreements — Standard Features
- The parties are identified, and a separation date is stated.
- All unpaid expenses, unused accrued vacation, PTO will be paid.
[This is not new consideration for the Agreement, but more of an assurance that the employer will do what it is already obligated to do.]
- The severance: either in lump sum, or by installments, usually coinciding with the payroll period. Sometimes without tax withholdings, but often subject to withholdings;
[For you the employee, lump sums are preferable. Employers will sometimes find an excuse to stop the installments by alleging you are in breach of some term of the severance agreement.]
- Sometimes, COBRA payments will be applied for 18 months or less;
[The payments usually are set to coincide with the number of months covered by the severance as a payroll calculation. The employer will often arrange for direct payment to the carrier for the stated period. After that, you pick up the payments. Also, either way, you must pay whatever share of the premium you covered from your paycheck during the employment.]
- Sometimes outplacement assistance.
[Employers make a big deal out of this benefit, but the value is entirely dependent on the depth and quality of the service. Unless the service is executive level, and includes coaching and career counseling, it probably is a throw away.]
- There may be a ‘no re-employment” with the company provision.
[In addition to be insulting, these are often unnecessary provisions, but they show up repeatedly. A 2015 case in the Ninth Circuit puts in question whether these kinds of restrictions are enforceable because unduly interfering with an employee’s right to pursue his or her occupation, especially if they extend to affiliated companies and subsidiaries.]
- A provision to return company property.
[This can get tricky, especially if you’ve taken and withhold inside information on processes or sales, or technical “intellectual property” information. Plainly stated, if you created or used the data during the employment, it belongs to the employer. But whether the process, formula, sales data etc. is a “trade secret” is a more complex question. Severance agreements often are more than just purchases of a general release. The employer may include in the agreement a provision that you will keep virtually all company information confidential.]
- A provision allowing set off of the severance for any debts owed to the company by employee.
- Employee agrees to cooperate with employer to assist employer with finalizing tasks underway during employee’s employment.
[This is a strange provision that seems to be a form of unpaid consulting agreement, or worse, a form of continuing unpaid employment. Frankly, unless some specific allocated consideration is given for this indenture, I believe the required indefinite obligation to provide services is illegal.]
- Non-disparagement, often unilateral.
[Basically, you are not to say bad things about the Company or its management. Often, these do not include a bilateral provision that the Company management will not disparage you. Often, this bilateral clause can be added if requested.]
[You won’t tell other current or past employees how much severance you received.]
- If breach by employee of any material clause, the payments (installments) stop.
[This clause is uncommon, but I see it occasionally. It gives the employer the apparent unilateral power to stop payments, or demand return of the entire severance payment, if you’re disparaging the company, disclosing confidential company information, or if you failed to return company property. This ploy may be illegal if the harm to the employer is minimal or speculative.]
- A general release of all claims, followed by a lengthy specific listing of the claims included in the general release.
- A waiver of Civil Code Section 1542 rights (the California right to preserve claims if you didn’t know they existed at the time of releasing all your claims).
- An exclusion of EEOC discrimination filings or limit of participation in an EEOC investigation.
[This is required by law, including some provisions from the federal Age Discrimination in Employment Act (ADEA) that require these severance agreements to provide either 21 or 45 days to consider before signing, and 7 days to revoke after signing if the severed employee is age 40 or older. This ADEA law also requires a statement in the Agreement that the employee is allowed to seek legal counsel to review the Agreement.]
- The full agreement, but a statement of continuing duties under any pre-existing non-disclosure and trade secret agreement, or other contractual duty to the employer.
[Sometimes, an entirely new trade secret and confidentiality provision will be injected into the severance agreement, in which case, because the employment has intended, the severance really operates as new consideration for that confidentiality.]
- IF ADEA, either 21 days, or if several persons’ employment ended as part of a general layoff, then 45 days to consider before signing [ADEA]
[This 21-day period (or 45 days if a larger layoff is in progress] to consider the agreement can be waived by the employee, and the employer may not withdraw the offer for that 21 (or 45) day period].
- 7 days to revoke.
[Unlike the 21-day period to review the severance proposal, the 7 days to revoke after signing cannot be waived.]
- A choice of law and maybe a choice of venue.
[You will want and require California law and a California venue.]
- Possibly a new trade secret obligation.
- A provision that this is the full agreement and modification only in writing.
[Unless specifically excluded, all prior agreements are now pre-empted by this new agreement. Other concurrent private verbal understandings or promises about the severance terms are of no legal enforceability.]
- A provision that disputes re agreement will be arbitrated.
- IF ADEA, your right to consult with an attorney before signing the Agreement.
Severance Agreements — What Employers Generally do NOT include in the Contract
- A provision that you will be able to recover your attorney fees if you sue and win for an employer’s breach of the Agreement;
- A provision that the employer will pay all costs of arbitration if necessary to sue under the severance agreement;
- An explicit statement that your termination is without cause related to your performance, but is an involuntary termination related to reduction of costs or reorganization. [This clause would be of help if you are applying for Unemployment Insurance Compensation];
- A statement that you may qualify for Unemployment Insurance Compensation despite receiving the severance. [In California, the receipt of severance, even if paid as if continuing wages, does not disqualify the recipient from obtaining Unemployment Insurance benefits for the same period as the payments].
- A provision that the employer (or specified managers) will not disparage you to third parties;
- A provision that prospective employers seeking a job reference or confirmation of employment will be provided ONLY the dates of your employment and your job title (Sometimes referred to as a ‘neutral reference’);
- A specified pre-determined measure of your damages set by a dollar amount for breach of the agreement by the employer [known as “liquidated” damages.]
- A provision that the release will be deemed rescinded, and all consideration to be restored if the employer breaches its duty to make timely payment;
- A provision that payments are to be timely delivered, and that time is of the essence for delivery. [implying a substantial breach, and associated “liquidated damages” for late payment];
- A general release of all claims that the employer may have against the employee;
- A statement that you are eligible for rehire.
- A statement that the employer will keep your claims against the employer confidential.
- A provision that the employer will communicate to your managers that they are not to discuss the circumstances of your termination of employment with third parties, or other persons, including current employees, who have no good business reason to know the information.
- A promise to deliver your personnel file to you (by copies produced) for your review before your 21 days to consider the Agreement will be deemed to start.
- That the Company has or will immediately return to you at its cost all your personal property it may locate on its premises.
I list these non-incorporated points because a) they show the imbalance in power during the early stage severance negotiations and b) some of these points can be negotiated into the final agreement, in addition to the the monetary consideration. For example, it is often the case that non-disparagement can be added, a “neutral reference” provisions, a return of your property, and a statement that the termination is not performance related. But most of the other points are obtainable only if there is a substantial threat of meritorious and expensive litigation.
Severance Agreements — Practical Questions Answered
- Q: What if I don’t understand everything in the Agreement? A: Don’t sign it. Seek legal counsel, or at least do some internet research. Use your 21 days.
- Q: What if I still haven’t reached an informed decision as the 21 days is approaching? A: Don’t be rushed. Request an extension of time from the employer, explaining you are having difficulty understanding the agreement, and are looking for help. In any event, set the date carefully on your calendar (21 days runs from the date the offer is delivered to you).
- Q: Do I need an attorney to look over the Agreement? A: These agreements contain technical language drafted by attorneys representing the employer. Also, the employer will not disclose your legal rights other than what is required to be disclosed by the ADEA in the severance contract. So, “yes,” invest the time and money.
- Q: What is involved in an attorney reviewing the document? A: The attorney will read the document for any misleading, false, or highly unusual provisions. The attorney will also inquire of you for facts that are relevant to identify potential claims for defamation, discrimination, harassment, whistleblower retaliation, or other legal wrongs that would take the value of the “general release” outside the amount of the offered severance.
- Q: So if I decide to turn down the severance. What next? A: Your attorney will notify the employer that you deem the severance inadequate, and make a proposal for a better payment, and if that fails, will proceed to file a civil lawsuit for damages.
- Q: What are the risks that I will lose the severance offer? A: Minimal, but always a risk. No decision is risk free. The employer may pull the offer; or may not renew the original offer after you have rejected it. Few employers are so foolish (but some are vindictive or arrogant) enough not to close the deal on the original terms if the employee should elect later not to press on. But, you should resolve from the outset that you will sue if forced by the lack of any degree of employer flexibility in the negotiations. Risk assessment is a very personal matter. Lawyers are not equipped to counsel you except in assessing the merits of your legal case. Only you can decide the economic, emotional, spiritual, and even the physical aspects of walking away from the severance offer. Obviously, token payments are easier to reject than severances of six to 12 months.
- Q: What is the upside of rejecting the severance? A: One gain is the hope of justice, or at least the satisfaction of fighting for the principle of justice even if it is not obtained. Another gain is compensation greatly exceeding the severance offer because calculated by your lost earnings, your emotional harm and the recovery of your attorney’s fees.
- Q: Can I get more than the severance offer? A: This is a more complex question than it may seem. The answer is “Yes” if your claims are valid, the lost earnings and emotional injury to you is or will significant; the employer is capitalized or insured sufficiently to pay an ultimate settlement or verdict, and the employer is motivated to contain the adverse publicity associated with a public exhibition of its misconduct. But there is another important factor as well: company power centers and the personalities that occupy those centers. When upper management is accused of violating the law by harassment, discrimination, or retaliation, a business matter can turn very personal. If these same persons are the settlement decision makers, they may have their own agendas in refusing to settle.
- Q: How long will it take to negotiate my severance package? A: Your attorney should act promptly to have a written informal statement of your position to the company within one to three weeks of your decision to proceed. This “demand letter” is then routed by the company’s executives to the company’s attorney, who generally will be ready to discuss the issues in a confidential manner. It is to your advantage to conclude these discussions promptly, or alternatively to file your action, as witnesses and evidence may disappear with undue delay. Generally 90 days from the date of your demand for increased payment is sufficient time to reach this “early stage” determination.
- Q: How do you conduct the negotiations? A: While it is necessary to state and even “stake out” legal positions, threat and counter-threat is an unproductive negotiation style by either party. The best negotiation proceeds by a confidential and therefore candid statement by both parties of how they see the strengths and weaknesses of the case, even if that includes an admission that a particular theory of recovery or defense has flaws. When this approach is taken, the parties can move to a middle ground by a process of “give and take.” All negotiations are implicitly designed to go through inevitable phases, and it is a mistake to rush a negotiation quickly to “Just give me your bottom line.” The better approach is grasp that each side has a “range of reason” and if those ranges can find an area of overlap, the case will settle. The negotiation can proceed over days and weeks as the attorneys exchange new information, provide additional argument, and consult with their clients concerning risks. If the attorneys cannot settle within their clients’ authority, the case proceeds to litigation, and all settlement discussions are excluded by law from being used as evidence.
- Q: How much will this cost me? A: A severance negotiation can proceed by hourly fee or contingency fee, or some combination of the two. The terms are negotiable.
- Q: Can I negotiate for more severance on my own? A: I don’t advise this approach because in my experience it seldom works and often hurts. You state your uninformed position for a settlement, or make admissions harmful to your potential future negotiations. You fail to get a better offer, and then seek legal counsel. As a result, the employer’s attorney will be fond of reminding your attorney of the low-ball offer you were ready to accept, and will continue in the belief your real position is your original demand.
- Q: So how do we get more money? A: You emphasize the value of your case for settlement through recitation of the facts and law. You outline your likely future economic and emotional injuries. You make the case that the costs of not settling is likely greater than the cost of settling. In discrimination cases, this is a particularly true proposition because attorney’s fees accrue as the case progresses, and the accrued fees become a factor in future negotiations. The California anti-discrimination laws allow you to collect fees and costs, but denies the employer than equal opportunity. Of course, the ultimate weapon is trial, and the threat of a verdict.
Severance Agreements — Getting Help
Severance agreements can seem inscrutable to the untrained eye, and employees are skeptical that the agreements reflect their best interests. The skepticism is justified. The employee may have hundreds of thousands of dollars in economic and emotional loss caused by a wrongful layoff or wrongful firing, and is being offered a small fraction of the likely case value. Yet, without legal counsel, the employee will be signing the severance agreement in the dark. Making matters worse, employers often respond to employee’s uninformed efforts to improve the severance by stating: this is our standard severance and is non-negotiable. The employee’s only way to obtain parity is through legal counsel. An experienced employment law attorney can state the facts and law demonstrating to the employer’s counsel that the “standard package” is not adequate compensation. But your attorney’s skill set must not end there. Severance offers are opportunities for early discussion on what both sides can accept as a reasonable compromise. Failing that, your counsel should also have the ability, if your direct, to carry through with litigation.
For the Federal Equal Employment Opportunity Commission [EEOC] summary of considerations when offered a severance agreement, read Understanding Waivers.