Severance Pay: The Silver Lining of Being Terminated

Employee Rights Attorney

Mission Viejo, California

Severance pay may be the only good to come out of one of life’s most stressful events-termination of employment. Negotiating the best severance package requires a thorough understanding of possible issues and options.

Are Employers Required to Pay?

Although severance pay is not generally legally required, there are exceptions. Actual practices or promises of your employer may provide for severance pay. If you are a member of a union, a collective bargaining agreement usually requires some sort of severance benefits. Federal law requires that certain employers pay 60 days of pay if 60 days prior warning of termination has not been given. It also requires certain employers to partially fund insurance programs after the date of termination. State laws vary as to payment of accrued vacation and sick leave upon termination. All of these payments could be considered a form of severance pay.

Reasons Paid

Even though it is not usually required, many employers provide severance pay anyway to avoid lawsuits, assist loyal departing employees, help morale of remaining employees, or comply with the law.

Amount

The amount of the severance usually depends upon length of service, amount of compensation, level of employment, goodwill of the employer, and extent of possible claims against the employer. Many companies pay a week or two of severance pay for every year of employment. Stress your value to the company and the extent of your damages. Make them understand their potential liabilities.

Can Such Agreements Be Revoked?

Many severance agreements which require a full release of an employee’s rights are revocable. It is illegal for an employer to condition a release of rights on receipt of money that is already owed to the employee, such as earned wages. In fact, failure to promptly pay wages upon termination can result in fines, a continuation of wages and a criminal penalty against the employer. Releases which are forced upon an employee through duress or fraud are revocable. To be effective, age discrimination waivers must include a waiting period of 21 days or more, a seven‑day revocation period, and instructions to consult an attorney. A waiver is voidable if it does not state it encompasses the entire understanding of the parties, does not restrict future modifications to a signed agreement between the parties, does not restrict future modifications to a singed agreement between the parties, and involves no consideration of money or other benefit to the employee.

Negotiating the Agreement

In negotiating a severance agreement, knowledge is power. Find out how the company treated other employees. Review the employee handbook to see if there is a commitment in writing. Understand any potential claim you may have against the employer, after perhaps consulting an attorney. If you have been given a deadline by the employer to accept or reject its severance proposal, give a shorter deadline on a proposal of your own. If a severance proposal does not include a release, take what you can get and then later try to get more for your release. Remember that it does not hurt to ask. Play upon the employer’s logic as well as their emotions of how you need additional money for your family. Try using yourself, your union representative or your attorney. Understand your claims and what you are giving up before you waive your rights.

Benefits Beyond Money

Besides money, negotiate for: medical benefits; qualification for pension plan; outplacement assistance; college courses; moving expenses; use of a computer or printer; office space; use of phone and message center; access to secretarial staff; nullification of a non‑compete contract; use of the company’s on‑line database; programs or customers that you would like to take with you; a favorable letter of reference; payment of disputed expenses; vacation or sick leave; retaining certain company property; and not contesting unemployment compensation.

Classification

The employer might be willing to classify your severance as a layoff, termination, resignation or reorganization. This might make a big difference in your ability to obtain unemployment compensation or a subsequent job. They also might be willing to adjust your final salary or closing position as well.

Taxes

It is possible to allocate all or part of the severance payment to non‑taxable claims. As a general rule, some CPAs say employers pay an additional $12 for every $100 they pay to an employee for taxable wages. Additionally, employees pay up to 40 percent or more for taxes on wages. If taxes can be eliminated, both the employer and the employee win. It is important to obtain the employer’s agreement to correctly allocate the payments and to resolve whether or not a W‑2 or 1099 form will be submitted. The timing of the payment may also affect taxes. You may want to delay it or get it all at once.

Release

Usually an employer will require a release to be signed by the employee for any substantial amount of money. There may be a provision waiving your rights even if you don’t discover some of your rights until a later date. Unless the release language is very precise, laws may invalidate it.

Confidentiality

Most employers will want to keep the agreement confidential so other employees won’t learn of it. The employer may require a “liquidated damages” provision that pre‑specifies the amount of money that the employee will pay upon breach of confidentiality. Also the employee may be restricted from encouraging or assisting other employees to make claims against the company.

Non‑Disparagement

The employee should negotiate for a helpful letter of reference and a commitment from the employer to give favorable or at least neutral recommendations to prospective employers. Likewise, the parties may agree not to defame each other, even though it is the law anyway. Overreaching conditions such as those requiring the employee not to disparage or do or say anything against the “best interests” of the employer should be opposed.

Non‑Competition

A non‑competition agreement is narrowly construed in law. One must be very reasonably drafted in terms of duration, geographic coverage, and extent. Many otherwise favorable severance plans become worthless to employees because of over‑bearing non‑competition clauses.

Other Conditions

Employees are usually not subject to rehire. Employees must return property to their employer, such as a car or computer. The employer does not admit any liability in agreeing to any severance plan. Trade secrets to protect customer lists are common, but may be voidable. Payment may be terminated if the employee gets another job. The pay may be conditioned on the employee providing consulting services over a period of time, but risky to the employee if there are no limits or extra compensation for such services.

Conclusion

Severance pay may constitute “free money” to you at a time you desperately need it. Take time to do your homework. Figure out your damages, consult your attorney or advisor on your rights and then negotiate the very best package possible. After all, you deserve it.