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.
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.
It is always wise to consult a qualified employment attorney when evaluating a proposed severance agreement. Our lawyers at Haeggquist & Eck, LLP are prepared to help assess your personal circumstances and the specifics of the agreement’s terms before advising on how you should consider proceeding. If you believe you may have been the victim of wrongful termination, we can determine if you have a solid case and work with you to protect your rights and pursue justice. Our team has substantial experience helping employees confront employer mistreatment and will do whatever it takes to achieve a positive outcome in your case.
If you have questions about whether you should sign a severance agreement or believe you are the victim of wrongful termination, call (619) 468-5222 or contact us online to schedule a free case evaluation.