Evaluating Whether It Makes Sense To Accept a Severance Package Offered by Your Employer
Losing your job is often a frightening experience, and you may feel financially vulnerable if you are unsure of where you will find your next employment opportunity. When you are being laid off, your employer might ask you to sign a severance agreement – a contract, which typically includes some level of monetary compensation in exchange for a release of your legal rights.
Should I Sign a Severance Agreement?
Signing a severance agreement to obtain a much-needed payout can be understandably tempting, but you should always be careful to protect your interests. Employers will often use severance agreements to restrict your rights in pursuing legal action against them in the future. Consequently, you must thoroughly review the terms of any severance agreement and weigh the pros and cons of signing. Below, we review many of the questions you should be asking, what to watch out for, how and when you should negotiate, and other important factors to consider.
Why Are You Being Offered a Severance Package?
It is important to understand that businesses operating in California are in no way obligated to necessarily offer you a severance package when you are being terminated. This is true even if you are being dismissed due to factors outside your control, like a company-wide layoff. Therefore, you must evaluate why your company has chosen to offer you a severance package and what they hope to gain from you signing a severance agreement.
Note that severance packages can sometimes be obligatory if there are provisions requiring one in your employment agreement. A mandatory severance offer is often included for senior executives and other salaried employees. Unions can also sometimes require some level of severance be offered. An employer might openly have a policy to offer severance packages as a reward for company loyalty.
Absent an existing contract or company policy, however, an employer is most likely to offer a severance package when they seek to protect themselves from future legal action. To accomplish this, the company will attempt to incentivize you to sign a severance agreement, which will voluntarily restrict some of your rights.
If all of this sounds a bit dubious, be aware that severance agreements in most circumstances are considered perfectly acceptable by California courts. Many common provisions of a severance agreement are legally enforceable. In some cases, employers may attempt to include terms that are not enforceable and will not hold up to scrutiny in court. You must also sign the severance agreement voluntarily.
What Are the Terms of the Severance Agreement?
In order to receive the monetary incentives of a severance package, you will first have to sign the severance agreement. It is critical you understand that these terms are seeking to protect the company, not you. Never sign a severance agreement without carefully reviewing its contents. Make every effort to understand what each item means and how it can impact your future rights.
Common provisions of severance agreements include:
- Non-disparagement requirements. This means you will not be permitted to publicly speak negatively about, or “disparage,” the company or its employees.
- Restrictions on your rights to file future lawsuits against the company. Signing a severance agreement can mean voluntarily relinquishing the ability to file or participate in lawsuits against the employer, even in situations where there is a legitimate offense. These types of clauses typically preclude you from pursuing cases involving wrongful termination, employment discrimination, sexual harassment, and retaliation.
- Non-disclosure agreements. In many cases, you will have already signed some form of a non-disclosure agreement, or NDA, as a condition of your past employment. A severance agreement will often reaffirm, renew, or modify the terms of a previously signed NDA. Additions often include restrictions on speaking about why you were dismissed and the terms of your severance package.
Generally, these types of severance agreement terms are considered legally enforceable. This means that if you violate the agreement, your employer has the option of filing a lawsuit against you.
Are There Any Red Flags in Your Severance Agreement?
As we mentioned above, there are some terms that employers will sometimes insert into severance agreements that are neither lawful nor enforceable. In these situations, an employer is banking on an employee not understanding their rights and not having the resources to litigate the matter should it later become a point of contention. Consequently, it is important to identify problematic terms and address them before an agreement is signed.
Examples of terms an employer cannot enforce in a severance agreement include:
- Requirements that force you to lie under oath. While an employer can include non-disparagement and nondisclosure clauses, they cannot force you to lie if called to testify in court.
- Requirements restricting your ability to report crimes. While a severance agreement can preclude you from filing lawsuits against a company, they cannot prevent you from reporting crimes carried about by the company or its employees.
- Non-compete clauses. There are some very limited situations where an employer may be able to specify you cannot work within a given industry for a certain amount of time after your dismissal. California has historically rejected any attempt to enforce these provisions.
- Any relinquishing of owed wages. An employer cannot lawfully deny you wages that you have earned, including overtime, and unused vacation days. It should also be noted that an employer cannot delay the payment of final wages due to an ongoing severance negotiation.
If one or more of these types of clauses appear in your severance agreement, proceed with extreme caution. Do not sign the severance agreement without first consulting with an experienced employment lawyer.
What Is Included in Your Severance Package?
There is no reason to sign a severance agreement without a robust severance package to justify your relinquishing numerous rights. Companies typically set their own policies on the monetary size of a given package or determine them on a case-by-case basis.
In most cases, the amount offered in a severance package will scale with the number of years that you have been employed at the company. On the lower end, a terminated employee can expect to receive a week’s pay for each year worked at the company. For example, if a person worked at a company for 5 years, they would potentially be offered 5 weeks’ pay in their severance package.
Employers could potentially offer more, with some companies choosing to offer 2 weeks’ pay or even a full month’s pay for each year worked. Your employment or union agreement might also specify the minimum amount of a severance package.
High-ranking executives can even potentially receive a “golden parachute,” a lump sum severance package that is in theory a reflection of their contributions to the company. These larger deals are often negotiated in advance as part of an employment agreement when an executive joins the company.
Can You Negotiate the Size of Your Severance Package?
There is no rule preventing you from attempting to negotiate the terms of your severance agreement or the size of your severance package. You should always know your worth and take the necessary steps to protect your interests.
Keep in mind that severance agreements tend to be inflexible, with companies often refusing to budge on modifying common terms like non-disparagement causes. The only major exception is when concerns about a legally questionable or unenforceable provision are raised. Your employer is likely to take you more seriously if you retain legal representation to assist you in contesting objectionable points.
You may have more luck when negotiating the monetary size of your severance package. Remember that you are under no obligation to sign any severance agreement and can walk away at any time, meaning you may have some leverage in asking for a larger payout. Your employer might attempt to lowball you with a paltry severance despite years of loyal commitment to the company. If you are only being offered one week’s pay per year worked, consider asking for two week’s pay per year. There is generally no harm in countering, and companies are incentivized to do whatever it takes to get a severance agreement signed.
Note that you may have a limited ability to counter depending on your circumstances. Those who belong to a union may have negotiations handled on their behalf by their representatives. An employment agreement might also explicitly lay out the terms of a guaranteed severance offer.
If you have only been at a company for a short amount of time, a severance package may not be offered at all. If you do receive an offer, you will likely not have much room to negotiate, as by that point you will only have made limited contributions to the company.
Are You Considering Legal Action Against Your Employer?
This is perhaps the most important question to consider when evaluating whether you should sign a severance agreement. Most of the rights you give up when signing a severance agreement hinge your ability to participate in legal action taken against your employer.
If you believe you were wrongfully terminated or retaliated against by your employer, you should not sign a severance agreement without first consulting with a lawyer. It can be tempting to accept the immediate lucrative benefits of a severance package, but it is critical that you not give up your rights in the process. A successful wrongful termination lawsuit can lead to the reinstatement of your job, the recovery of lost wages, and awards for punitive damages. In addition to holding your employer accountable for their actions, you will likely receive more money as part of a successful legal action than you would through a severance package.
Employers understand this, which is why their only priority is to protect themselves by limiting financial liabilities. It is typically more cost-efficient to pay a hefty severance package versus undergoing a legal battle waged by a former employee, even if the matter is eventually settled out of court.
Why You Should Seek Help From an Attorney
First, your attorney can review your severance agreement and advise you of potentially adverse provisions in the contract. If you received a severance agreement, your employer (more likely than not) used an attorney to help them draft the agreement.
In using an attorney to help them draft your severance agreement, your employer likely took every opportunity to insulate themselves from a great deal of future risk. For example, most severance agreements contain provisions that make it so that you cannot disclose what you learned or heard while in the workplace and may include penalties if you violate the provision.
Additionally, most severance packages will have some form of limitation of liability on behalf of the former employer. Once you sign the severance agreement, you can no longer sue your employer for any damages for discrimination or other unlawful conduct, such as wage and hour violations. If your employer violated your rights, you give up your ability to take legal action when you accept the severance.
If you are not sure whether or not your severance package will fully cover what you thought it should financially, signing means you can likely never do anything about your concerns. The severance agreement will have been carefully constructed by your former employer’s attorney so that it limits your rights while maximizing the benefits to your former employer.
Even if your former employer does not have an attorney helping them create the severance agreement, you need your own attorney to help you. Your employer might have included illegal provisions in the agreement or could violate laws or statutes in the language that they used.
What they include could be unenforceable, or it could be enforceable and put you in a negative position. Without legal guidance when drafting an agreement, the agreement could be detrimental to either party signing it.
Severance Packages Often Include Non-Disclosure Provisions That Could Expose You to Liability
The contents of your severance package will likely include provisions that require that you not disclose information that you learned while you were employed. This could include information that is essential to the job or trade that you learned and would be valuable to you in your working life after your time with the company.
Non-disclosure agreements can also include penalties and other provisions that could expose you to future liability or litigation. Former employers are not always honest or positive in their intentions, and a carefully crafted non-disclosure agreement could make it so that you have a difficult time getting a job in a similar company or the same industry without exposing yourself to costly litigation in the future.
Non-Compete Clauses in Your Severance Package Could Make You Unemployable
When you are losing your current position and receive a severance package offer, you are likely going to be considering what you will do next to earn a living and support your family. Without a steady income, your financial stability might maintain for a decent amount of time, but the economy is not always stable, but the inflation rate has been on the rise in a very stable way.
Keeping this in mind, knowing that you can line up valuable employment that puts your skills and experience to use is important. However, your severance package might include a non-compete clause that prevents you from working for another company in the area or industry for some time.
A non-compete clause might not seem especially intimidating at the moment of signing your severance package, as you are also ideally getting a check alongside your severance agreement. You can rest assured that this check is as low as possible from the perspective of the employer, as they intend to maintain profitability while getting rid of the employee they are breaking ties with.
The severance package might seem to cover some of your lost wages or salary and other work benefits for some time, but unless you are getting a platinum parachute like the disgraced executives of corporate American during the banking crisis, your settlement amount will run out, and you will be seeking out additional employment.
Losing Employment Value Can Entitle You to Legal Relief
Some severance agreements prevent you from putting your valuable experience and education to work for you. When this happens, your specialty degree with a high student loan payment becomes a liability, as you cannot work in the field, but you still have to keep making student loan payments.
Employers cannot enforce some non-compete agreements for this reason.
When your non-compete agreement prevents you from finding gainful employment that is equal in value to what you did before, a court may refuse to enforce it.
While you might think that you have to take a lower-paying job in another industry or work a lower position because of the severance agreement you signed, this may not be the case. In fact, if you did not work in gainful employment for a considerable amount of time and missed out on wages and benefits because of an unconscionable severance package and non-compete agreement, you could even seek damages.
Your Employment Attorney Can Help You Collect Your Full Benefits
When you receive a severance offer that seems lower than it should be or fails to effectively cover what it should, your employment attorney can help. Our experienced California employment attorneys have handled many cases involving severance and know the norms.
Employers and their lawyers take advantage of employees who have never gone through a severance negotiation by offering them as little as possible while encouraging them to sign as quickly as possible.
Your employment attorney will step into your shoes, take over all negotiations, and ensure that you receive the fullest possible severance package that your employer is willing to provide. If you already accepted a severance agreement, your attorney might have a solution.
If you have questions about whether you should sign a severance agreement or believe you are the victim of wrongful termination, call (619) 342-8000 or contact us online to schedule a free case evaluation.