10 (More) Common Questions about Severance Agreements

Apr 12 2018

Our previous blog post, “10 Common Questions about Severance Agreements,” seems to be attracting a lot of attention. But apparently, there are more than 10 frequently asked questions about severance agreements. So to help you figure out what to make of the contract in front of you, here are the answers to 10 (More) Common Questions about Severance Agreements.

1. Why do employers offer severance agreements?

Many people don’t stop to ask this question, but if you’re hoping to negotiate a severance package, it is smart to think about why your employer might want to offer one. Or, framed another way: What do you have that you can give up in exchange for a severance?

The most common answer is that employers offer severance to avoid being sued. They want a release of all your legal claims and to know that you’re not going to cause problems for them in the future, and they’re willing to pay to get it. How much they will pay depends on a number of factors, including the chances you will sue and the merits of your underlying legal claims.

Employers also provide severance packages to protect or enhance their brands or to keep up with their competition. Companies want to be known as employee-friendly; it helps them attract new talent and keeps their talent from leaving voluntarily. In all likelihood, the job you just had will not be your last, and you are going to continue to talk to other people in your industry about your employment experience. Your employer doesn’t expect you to be happy about being laid off, but it also wants you to be able to tell your friends and colleagues that your employer did the right thing.

Less cynically, employers sometimes offer severance packages because their managers believe it is the right thing to do. This is particularly common with layoffs or reductions-in-force, where you did nothing wrong and your selection for termination has nothing to do with your performance. Employers recognize that, in many fields, it takes time to find a new job, and they want to provide a financial “runway” for you to “take off” into your next opportunity.

2. Do I have a legal right to severance payments?

Most Connecticut employees do not have a legal right to severance payments. For those who do, it is usually the product either of individually-negotiated employment contracts or union contracts (also known as collective bargaining agreements).

If you do not have an employment agreement (either written or verbal) and are not a member of a union, then your only “right” to severance in Connecticut is through an employer-promulgated severance policy. Your former employer might have a policy that provides for a certain minimum severance for all employees who are laid off or terminated. Payments under these policies are often based on a combination of years of service and base salary rate, although the policies can vary widely. If you do not know whether you have a right to severance under an employer-promulgated severance plan, you should ask your employer’s human resources department or contact an employment lawyer.

If you do not have a contract and your employer does not have a severance plan, then you generally are not entitled to severance payments in Connecticut. However, for the reasons explained above, your employer may offer you a severance package even if you are not legally entitled to receive one.

3. Can I say “no” to the severance offer?

Unequivocally, “yes.” The decision of whether to sign a severance agreement is entirely yours to make, based on a variety of factors. If you want to say “no,” you can. No one can force you to sign a severance contract.

If you truly could not say “no” to a contract proposal (which is what a severance offer is), then the resulting contracting might be the product of duress. And duress sometimes can serve to undo a contract even after it’s signed. If you were forced to sign a severance contract and now regret signing it, you may want to talk to an employment lawyer about your options.

4. Can I negotiate?

Rather than simply saying “no” to a severance offer, you might want to make a counter-offer to your former employer — that is, to negotiate. As explained below, if you try to negotiate your severance package, you might risk your employer rescinding the original offer. Accordingly, you should analyze your situation, especially your tolerance for risk, to decide whether you want to try to negotiate.

5. Do I need a lawyer to negotiate?

You can negotiate directly with your employer — without being represented by an employment lawyer. However, an experienced employment lawyer will be able to advise you on the benefits and risks of negotiation. The lawyer also can analyze your situation and discuss what might constitute a reasonable settlement package under the circumstances. And the lawyer may be in a position to identify certain clauses in the proposed separation agreement that might appear to you (as a layperson) to be innocuous but in reality could be problematic. Plus, if you are going to ask a lawyer to review the written agreement after you negotiate, it is often best to get that lawyer involved at the outset. Even if you hire a lawyer, whether and how to negotiate for different severance terms is always your decision to make.

6. Can the employer rescind or revoke the severance offer?

Theoretically, yes. Severance offers are offers to enter into a contract, and like other offers to contract, they can have expiration terms. The employer can say when it makes the offer that the offer will expire after a certain amount of time, or the employer can contact you after communicating the offer to revoke what it has previously put on the table. If the offer expires or is revoked before you accept it, then there is no contract. Of course, if the employer wants to hold the offer open longer than it initially says, then it can. Be aware, as well, that a counter-offer technically constitutes a rejection of the original offer, such that the original offer is no longer necessarily available.

In practice, however, employers frequently hold offers open for a minimum of 21 days, at least for employees who are 40 years old or older. This is because a federal law called the Older Workers Benefit Protection Act requires employers to follow certain rules in order to obtain a valid release of federal age discrimination claims. The rules are extensive, but among the most important is that, in order for the release to be effective, the employee who is 40 or older must have been given at least 21 days — or 45 days, under some circumstances — to consider it. (The employee must also be given seven days to revoke or rescind her acceptance.)

7. The agreement includes a “release” or “waiver.” What is that?

A “release” or “waiver” extinguishes the legal liability that the released (or waived) party or parties (the employer) had to the releasor (you). Simply put, a release ends your right to sue. So, for example, if you release an employer from liability for discrimination claims, then the employer can no longer be held liable to you for discrimination in a court of law.

In general, the employer will ask for a “global release,” “general release,” or “waiver of rights.” This means that you are releasing the employer from liability for any and all claims you might have against the employer from the beginning of time until the date you sign the agreement, whether they relate to your employment or not. In addition, you generally are asked to release potential claims that you do not know about yet, so long as those claims would be based on actions that precede your signing of the agreement. You usually are not releasing any claims that originate after you sign the agreement, nor are you releasing claims to enforce the agreement, to receive workers compensation or unemployment benefits, or to receive vested benefits, such as a pension or 401(k).

Be very careful before you sign a release. In particular, you should be attentive to whom exactly you are releasing. In addition to the company you worked for, you might also be asked to release all related companies and all of their employees and shareholders. And if you worked for a large publicly-traded company, the shareholders alone might be thousands or even millions of people.

If you think you have a meritorious legal claim of any kind, you should be very cautious about signing a “global release.” If you were recently injured in an accident or otherwise affected by someone else’s negligence, for example, you should speak with a lawyer before signing any legal documents. A lawyer may be able to help you negotiate a carve-out or exception from what is otherwise a “global release.”

8. The agreement includes a “covenant not to compete.” Can they do that?

It depends. In Connecticut, non-competes (as they are typically known) are not necessarily invalid. If you agree to a reasonable restriction on your otherwise-unfettered right to work, and that restriction is justified by your prior employer’s legitimate business need, then the non-compete could be enforced against you and your prospective employer. Connecticut uses a five-part test to determine the enforceability of non-competes, and there is no “one size fits all” answer about enforceability.

If your proposed severance agreement includes a non-compete clause, be very careful. The restriction might seem minor right now, but in the future, it might prevent you from accepting a new job opportunity. Fortunately, it is not uncommon to negotiate the scope of non-competes and other anti-competitive covenants, although that is a negotiation best conducted by an experienced Connecticut employment lawyer.

9. What about a reference letter?

A mutually-agreeable reference can be an important part of the severance negotiation process. Some employers will agree to a detailed reference letter or to a script from which they will not deviate. Other employers will agree to share only your dates of employment and last job title and to say further that they cannot share any other information pursuant to company policy. This latter option is often called a “limited neutral reference.”

However, your employer is unlikely to propose a contract term that restricts its freedom to say whatever it wants (consistent with its duties under the common law). So if you want a particular form of reference, you should consider asking for it before you sign the agreement.

Separately, once you learn that you are being laid off, you may want to consider speaking to managers or colleagues at your company to determine if any of them will agree to serve as references. If so, you may be able to provide those people’s contact information directly to prospective employers and thus avoid general inquiries to human resources.

10. I have a stock plan. What happens to my equity?

Most employee compensation that involves equity — whether it is stock options, restricted stock units (or RSUs), or performance stock units (or PSUs) — is governed by an equity award agreement. That agreement, in turn, is governed by one or more employer-promulgated plans. Many of these plans provide for a vesting schedule for the equity you received as compensation. The plans also typically provide that, if you are not still employed by the company when the grant or option vests, it is forfeited. In general, the forfeiture of unvested shares is not illegal.

It is not uncommon to discuss equity as part of the negotiation of a broader severance package. Some employers may be willing or able to accelerate your vesting schedule. Alternatively, if your employer cannot accelerate the vesting schedule, it nonetheless may be willing to pay you cash to compensate you for the loss of your equity or options. However, negotiations over equity can be complicated, and they are best handled with the guidance of experienced employment counsel.

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About the Author

Joshua R. Goodbaum

Joshua R. Goodbaum

A graduate of Harvard and Yale, Joshua Goodbaum represents individuals in litigation and negotiation, with particular emphases in employment, civil rights, and appeals. He has represented clients in every level of our justice system, from local trial courts to the Supreme Court of the United States, in matters ranging from constitutional law to contract disputes. Learn More

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