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This content is for informational purposes only and is not intended to provide legal advice.
You’re about to be laid off. You probably have about 100 questions—once you get over the shock if you had no idea this was happening.
After you take a breath, you should understand that a very important aspect of a lay-off is a severance agreement.
Severance agreements are contracts between an employer and an employee that detail the conditions of an employee’s termination. A severance agreement provides financial support to employees who lose their position when it’s not they’re fault. This can be due to a reduction in force a corporate merger, corporate restructuring, downsizing, or the company goes out of business.
Although there’s no federal law requiring employers to offer severance pays, some state laws require it in certain circumstances. However, a severance agreement is fairly common these days.
The Severance Agreement Meeting
If you’re terminated from your job, and the company is offering a severance package, remember that typically, you’ll have some time, perhaps several weeks, to review the information and to accept the agreement.
Ask questions and get as much information as you can. That will be helpful as you examine the agreement’s terms.
Negotiating the Severance Agreement
Again, a company may offer employees a severance agreement which will detail the financial terms on which the employee will leave the company. After an initial examination of the severance agreement, it’s wise to engage the services of an experienced lawyer who looks into severance agreements.
Experienced legal counsel may be prudent, particularly in these situations:
- You believe you’ve experienced some form of illegal harassment;
- You have evidence of discrimination;
- The language in the severance agreement is too complex or overly broad;
- The non-disparagement clause is too broad;
- The non-compete terms are too restrictive;
- The geographic scope of the non-compete is too expansive; and
- The duration of the non-compete is too long.
Release of Claims
The severance agreement may have a clause limiting the conditions under which you can file an action against the company, such as a claim of discrimination or a wrongful discharge lawsuit. Also called a covenants not to sue, these terms can be signed to prohibit a former employer from initiating claims stemming from their employment; however, employers can’t keep employees from filing a charge or testifying before the EEOC.
Non-Disparagement Clause
This clause restricts an employee from saying negative things about the employer after they leave the company. This includes the company’s personnel, products, and services in any type of communication.
These terms must be reasonable and not overly burdensome.
Confidentiality Agreement
Also known as a non-disclosure agreement (“NDA”), this covers what company information an employee can share, use, or release. An employment NDA restricts employees from disclosing an employer or former employer’s company secrets.
While this may limit a current employee as to proprietary information, in a lay-off, you may be asked to sign an NDA in exchange for the severance payment. Employers may also want to keep the terms of settlement agreements confidential.
Non-Competition and Non-Solicitation Terms
As part of a severance agreement, an employee may be asked to sign a non-compete agreement. By signing this, the employee consents to not take a position with a competitor or a similar business for a certain length of time and within a given geographic area. The non-compete agreement must be reasonable to be enforceable.
Points of Negotiation or Discussion
After you’ve had a chance to review the severance agreement, preferably with an experienced employment law attorney, you should think about negotiating some of the agreement’s terms. Some larger corporations may have a standard severance package for employees in which the amount of benefits and severance pay is calculated based upon your tenure at the company. Nonetheless, your attorney may have some ideas on how state law impacts the standard agreement and what items might be open for discussion with the company.
Here are some of the common terms that may be negotiated:
Severance Pay. Again, the severance pay that’s offered is typically based on the amount of time the employee has worked at the company—usually, one to two weeks for every year worked. However, there may be some wiggle room in that equation, especially if the job loss will create an economic hardship for the employee. Perhaps your attorney can negotiate three weeks. Also, it’s common for managers and executives to receive a higher amount of severance pay, and it some cases, C-level executives (CEOs, CFOs, and COOs) may be offered pay for more than a year.
Insurance. This is a big item, especially health insurance if you have a family and will potentially be without coverage until you secure a new position. You should attempt to extend your health, life, and disability insurance coverage for as long as possible. Although the Consolidated Omnibus Budget Reconciliation Act (COBRA) permits employees to temporary continue the health insurance they enjoyed with their employer for 18 months by purchasing the employee share, it can be expensive. See if your employer is willing to pay for your health insurance coverage until you find a new job.
Unused Vacation Pay. Ask your employer to pay you for all of your unused vacation pay. The company may have a policy about this, or there may be a state law concerning how vacation pay is treated. Still, if you’ve accumulated a considerable amount of unused vacation pay, you may want to see if there’s a way to be paid for that.
Retirement Benefits. This will include pension plans and any company stock you’ve purchased. The impact of being severed from your employer on your retirement plan, pension plan, and stock plan will be different depending on state law and the policies of the employer. Ask for a copy of the policies and discuss them with your attorney.
Outplacement Assistance. It’s also a common part of a severance package for an employer to provide outplacement services. Ask the company to provide this until you find a new job. You can also ask to select the outplacement company yourself, but many large corporations will have a contract in place for a certain outplacement company. You can also ask for personal counseling services, retraining programs, and office services and support.
Departure Announcement. It may be a good idea to draft an announcement of your departure that’s agreeable to the company, especially if you hold a high-profile position or senior position, of if you manage a group of employees. You want to ensure that your exit story is one that works to your benefit.
References and Recommendation Letter. You should ask if the company will provide you with favorable references and a recommendation letter. Ask to create the documents yourself, and be certain to include your major achievements and awards. Attach these letters to the agreement. Also, if the company has a policy of not providing references, be sure to have a statement to that effect included in your package to share with future possible employers.
Takeaway
If you’re offered a severance package—especially one that requires you to sign a non-compete and an NDA—ask an experienced employment attorney to review the severance agreement and discuss the potential for negotiating specific terms.
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