16 Key Issues in Negotiating an Employment Severance Package

In an uncertain economy, almost any employee or executive will at some point face having his or her employment terminated. If you are terminated, you want to be able to negotiate a reasonable severance package, especially if you have an existing employment agreement.

There are a number of key legal and economic issues that should be considered when negotiating an employment severance agreement. If you are over 40 years old and the company offers you a severance package, the company must give you at least 21 days to consider it and 7 days to revoke after you sign the package. It will often be advisable to consult with a lawyer who is an expert at resolving these issues. And your ability to get additional severance pay or benefits will depend on any negotiating leverage and potential claims against the company you may have.

In this article, I discuss 16 key issues to consider in connection with negotiating an employment severance agreement, with a focus on severance agreements for executives. Severance agreements are binding contracts for settling any potential disputes between the parties. It should be understood that the employee will need to pick his or her battles on these issues, as it is unlikely he or she will prevail on all the issues.

1. Severance Pay

A company may be obligated to pay severance under the employee’s employment agreement, under the federal WARN Act or its state equivalent, or pursuant to company policy. Even if the company is not obligated to pay severance, it will often offer severance in exchange for various agreements from the terminated employee, including a release of any potential claims against the company (discussed below). An executive has the best chance to negotiate severance if the employee has been terminated without “cause” as defined in any employment agreement.

Here are the key issues to consider on the severance pay:

Can you get the employer to increase its offer of severance? (6-12 months of severance pay is typical for executives and potentially higher for CEOs). It will be helpful to know what other employees have received in similar circumstances.
If the termination is in connection with a “change in control” of the company (merger or other acquisition), the employee often argues that the severance pay should be greater. Note that such change in control payments may result in a 20% excise tax on the employee.
Can you get the severance in one all-cash lump sum up front, instead of spread out over time?
If the severance is a continuation of salary over a period of time, the employee will want to ensure that the payments continue even upon death or disability.
If the severance is going to be in installments, the employee should request that there be no offsets, mitigation, or clawbacks.
Should the severance pay also include any partially or fully accrued but unpaid bonus?
If the severance pay is continued salary for some period of time, does the continuation pay continue even if the employee gets a new job?

Any severance or other compensation paid to the employee will be subject to applicable federal, state, or local income and employment tax withholding requirements.

2. PTO/Vacation

The severance agreement should also cover any accrued but unpaid PTO or vacation pay, typically payable on the last day of employment or within a few days thereafter. The employer’s policies or Employee Handbook should be reviewed to determine what might be owed.

3. Medical Benefits

Under the Consolidated Omnibus Budget Reconciliation Act of 1995 (COBRA), a terminated employee is entitled to continue medical/health coverage under the company’s plans for up to 18 months after termination (up to 29 months if the employee is disabled under Social Security standards). However, unless negotiated, the premiums must be paid by the employee. Terminated employees often request for the company to pay the COBRA payments on their behalf for 6-18 months after termination. Because such employer-paid continued medical coverage may be taxable, employeesoften instead negotiate for a taxable lump sum payment equal to the cost of the medical coverage, sometimes “grossed up” for tax purposes. The employee also needs to determine whether to simply convert to a cheaper plan. The employee may also request that certain other employee benefits (death or disability benefits) continue for some period of time.

4. Options and Restricted Stock Units

Employees often receive stock options or restricted stock units and performance shares, or units that are subject to vesting and have limitations on when they can be exercised or earned. Here are some common requests by employees in connection with severance agreements:

Full or partial acceleration of vesting of stock options or restricted stock units. More often than not, the amount of equity vesting acceleration equals the cash severance so, for example, six months of cash severance equals six months of accelerated vesting. If the employee is terminated in connection with a change of control of the employer, greater vesting is often requested.
Ability of the employee to do a “cashless exercise” of any vested stock options, so that no out-of-pocket cash will be required to exercise the options
Longer periods to exercise any stock options (many stock options provide that they must be exercised within 90 days of termination of employment, but executives often request a one- or two-year extension).

5. Outplacement Assistance

Companies will sometimes offer the services of an outplacement firm, free of charge. Such outplacement firms can help you find a new job or position you for a career change. Inquire as to whether the company will include this as part of your severance package. Alternatively, you can ask for a cash outlay to hire an outplacement firm of your choosing (or just keep the cash outlay). This is typically a benefit in the range of $10,000 to $25,000.

6. General Release of Liability

The main consideration the company expects to obtain from making severance payments is a general release by the employee of any and all claims the employee may have against the company, known or unknown. This release language will be quite long, and attempt to cover any and all liabilities, complaints, promises, causes of actions, in law or in equity, against the company and its officers, directors, shareholders, employees, subsidiaries, parent companies, affiliates, successors, and assigns. The release will often set forth a number of specific potential claims released, including claims related to age discrimination, discrimination based on disability, violations of civil rights laws, violations of the Family and Medical Leave Act, claims for wrongful termination, and anything else. The goal of the company is to be absolved of any potential liability to the employee. So once the employee signs the severance agreement, various rights are permanently waived.

There are a number of issues that need to be addressed in connection with the typical broad release, to protect the employee:

The release is usually one sided—the company is released from potential liability. But in some circumstances, it is beneficial and appropriate that the release is mutual so that the employee doesn’t have to fear some litigation from the employer in the future.
The release by the employee should exclude any claims that can’t be waived as a matter of law.
The release by the employee should exclude any rights under the severance agreement.
The release by the employee should exclude any vested rights to any employment benefit plan of the company (stock options, retirement benefits, etc.).
The release by the employee should exclude any rights of the employee under any indemnification or advance of expenses provisions in the company’s bylaws or any employee officer or director Indemnification Agreement, or any policy of insurance maintained by or for the benefit of the company and its employees.
The release should exclude any claims for unreimbursed travel or other business expenses.

The release will usually cover both known and unknown claims, but some states such as California require specific statutory mandated language to waive unknown claims.

7. Non-Disparagement

Companies will often insert a paragraph in the severance agreement prohibiting the departing employee from publishing or communicating to any person or entity any “disparaging” remarks, comments, or statements concerning the company. And the provision may provide a definition of “disparaging” such as this: “Disparaging remarks, comments, or statement are those that impugn the character, honesty, integrity, morality, business acumen, or abilities in connection with any aspect of the operation of the individual or person being disparaged.” Such a broad commitment could be easy to breach, especially if the employee is trying to explain to a new employer why they left the last employer, so some limitations here may be appropriate.

The employee should also consider asking for any non-disparagement clause to be mutual. Here is language that has been approved by some employers:

“The Company shall not authorize and shall take reasonable measures to prevent its present or former officers or directors from making derogatory or disparaging statements regarding Employee to any third party.”

8. References

A key issue the employee will want to address will be how the company will respond to any reference checks or recommendation requests from new prospective employers. The employee could request a section of the severance agreement to state: “Company acknowledges and agrees that Employee has performed admirably in his/her work with the Company and Company will provide positive recommendations to any interested new employers of Employee.” Alternatively, the employee could seek to obtain positive recommendation letters from supervisors, and have the company provide those letters to any new employers inquiring about the employee’s past performance. However, in many instances, employers will only confirm that the employee worked at the company and was in good standing.

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9. Non-Solicitation of Employees and Customers

The company may include a provision in the severance agreement prohibiting the terminated employee from soliciting other employees to leave the employment of the company. This would normally be subject to a limited time period (six months to a year) and should not apply to general solicitations of employment not specifically directed to employees with whom the employee did not work.

The company may include a broad prohibition on the employee soliciting any customers of the company. Such a prohibition could meaningfully limit the employee’s future employment possibilities and be deemed an illegal “stealth non-compete,” and the employee should argue that it be limited to using any confidential information of the company in attempting to solicit customers.

10. Non-Compete

Sometimes, employers attempt to extract a non-compete covenant from the employee, preventing the employee from working with a competitor for a designated period of time. This is obviously problematic for the employee, and must be narrowly drafted or there should be adequate compensation for the non-compete. Some states, such as California, prohibit outright such non-competes unless the non-compete is negotiated in connection with the sale of a business or involves confidential information. Even in states where a non-compete is legal, they are typically limited in duration to six months to one year and in geographic scope. If agreed upon, the employee will typically ask that the competitors be listed and limited to a few direct competitors.

11. Dispute Resolution

The offer letter or employment agreement that the employee signed will usually specify the manner of dispute resolution. In negotiating a severance agreement, it is typically in the employee’s interests to arbitrate and not litigate disputes. Here is an example of a pro-employee form of arbitration provision:

“Any controversy, dispute, or claim arising out of or related to this Agreement, breach of this Agreement, or Employee’s employment or termination of employment by the Company, shall be resolved solely and exclusively by final confidential binding arbitration, in [City], [State]. Such arbitration shall be conducted in accordance with the JAMS Employment Rules & Procedures (which can be reviewed at http:www.jamsadr.com/rules-employment-arbitration) in existence at the time of the commencement of the arbitration, with the following exceptions if in conflict: The Company will pay the arbitration filing fees and the arbitrator’s fees; one arbitrator shall be appointed by JAMS; and arbitration may proceed in the absence of any party if written notice (pursuant to the JAMS’ rules and regulations) of the proceedings has been given to such party. The parties agree to waive any rights to a jury trial or a bench trial in connection with the resolution of any dispute under this Agreement (although both may seek interim emergency relief from a court to prevent irreparable harm pending the conclusion of any arbitration). Any dispute or claim concerning the scope or enforceability of the arbitrations provisions of this Section shall be determined exclusively by an arbitrator pursuant to the procedures set forth above. The arbitrator shall have the power to award all relief available in law or equity requested by the parties and supported by credible, relevant, and admissible evidence.”

12. Legal Fees

The company will sometimes pay for the employee’s legal fees incurred in reviewing and negotiating the company’s form of severance agreement. The amount usually ranges from $7,500 to $25,000, depending on complexity, with fees often higher if the negotiation is protracted or there is a dispute.

13. Company Property

As part of the exit package, the employee may consider asking the company to let the employee keep personal property owned by the company but used by the employee, such as laptop or cellphone. If the employee is going to keep a laptop, desktop, iPad, or cellphone, make sure the company wipes clean any company proprietary data. You don’t want to be accused later on of taking or misusing company secret information.

14. Confidentiality

Employers generally want the terms of a severance package to be kept confidential, especially where the employee receives special consideration. The employee will usually accept the confidentially obligation, with these exceptions: (i) disclosures made to family members; (ii) disclosures made to the employee’s counsel, accountant, or financial advisor; (iii) disclosures to government or tax authorities; and (iv) disclosures arising from any legal or arbitration proceeding arising under the severance agreement.

The severance agreement will also likely acknowledge that any Confidentiality and Invention Assignment Agreement previously signed by the employee will continue in full force and effect.

15. Transitional Arrangements

Sometimes it is desirable for both the company and the terminated employee to enter into a transitional consulting relationship after termination of the employment. The company can take advantage of the employee’s expertise and institutional memory, while the employee may be able to generate some additional income. The key terms of such transitional agreements include:

Length of the arrangement and how the agreement can be terminated early
Compensation (hourly fee? monthly stipend?)
Services to be provided
Number of hours committed per month (or being available “on call” up to a set number of hours)
Restrictions on solicitation of employees and a non-compete
Confidentiality and invention assignment obligations
How disputes are to be resolved (often confidential arbitration is preferred)

16. Cooperation

The company will often include a “cooperation” clause, obligating the employee to fully and completely cooperate with the company in connection with any litigation or investigation involving the company.

The employee should attempt to limit the scope of the cooperation clause in the following manner:

The cooperation should be for matters related to the employee’s scope and period of employment.
Such cooperation should not unreasonably interfere with the employee’s subsequent employment.
The employee should be reimbursed for his or her time involved in the cooperation, at some designated hourly consulting rate (e.g., $400/hr.).
The employee should be reimbursed for his or her reasonable out-of-pocket, legal, and travel expenses.

Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on investing in Internet and digital media companies, and he was the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He was also a corporate partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, strategic alliances, and venture capital. Richard can be reached through LinkedIn.

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