For most employees, the end of employment feels like a kick in the teeth. When an employer terminates an employee, or strongly encourages an employee to resign “voluntarily” it usually means the end of a regular paycheck, the end of subsidized healthcare and bolstered retirement benefits, as well as the end of many relationships with former co-workers and clients. Under almost most circumstances, termination of employment brings up heavy emotional issues of shame, anxiety, depression and insomnia as well as financial and professional fears.
When Leo Apotheker was ousted by Hewlett-Packard’s board in September 2011, his severance package included $7.2 million to be paid out over 18 months, a $2.4 million bonus for eleven months of service, more than $3.5 million worth of restricted stock, and relocation expenses, including $300,000 to cover losses and expenses related to the sale of his California home. Plus, HP agreed to cover Apotheker’s legal fees for negotiating the severance package. (Deborah L. Jacobs, Fortune Magazine, November 2011).
Most employees can’t even dream of such a golden parachute. However, there are many lessons to be learned from Apotheker. First, according to a HP filing, not all of the benefits in Apotheker’s severance package were in his employment contract; some of the severance benefits were brought up and negotiated for after he was fired. Second, Apotheker maximized his benefits by asking for a wide range of income-positive contributions beyond the cash severance payment. Third, while Apotheker did not sue HP, he certainly did benefit from having a legal advocate negotiate his severance package.
No law requires any company to pay severance (unless a firing comes under the narrow Worker Adjustment and Retraining Notification (WARN) Act, which requires employers to give employees 60 days notice of certain mass layoffs or to pay 60 days of salary and benefits). However, an individual or union contract may require severance. Further, if the employer has a severance pay policy, it generally must comply with this policy.
Even if severance is not required by policy or contract, severance is the norm for involuntary terminations with many big companies. Very often the terms of severance are negotiable. According to a 2009 study by Manpower Co.’s Right Management, U.S. severance payments averaged 2.5 to 3 weeks of pay per year of service for “involuntarily separated” top and senior executives, and 1.4 to 1.8 weeks for other employees. Two-thirds of companies cap the total weeks that they will pay in severance. As companies usually would prefer to pay severance than to receive a wrongful termination lawsuit, negotiating a fair severance often is the best path to a smooth exit and a potential win-win for both the employee and the employer.
1. Seek Legal Advice.
Recently terminated or laid off employees often are not in the best mental or emotional state to evaluate their potential claims against their employer, to negotiate with the employer who just ended their employment, or to advocate in their own best interests during this turbulent time. A skilled employment attorney advocate can smooth the transition and potentially add significant value to the employee’s final severance package.
2. Take Time to Review and Consider the Severance Offer.
If an employer has offered a written severance, and if the employee is over forty, the employer must give the employee at least 21 days to consider a severance agreement. Older employees also have seven days after signing a severance agreement to reconsider and revoke approval of any agreement that waives their rights to bring age-related complaints. Many companies give younger workers the same 21-day review window.
If the employer has not explicitly offered the severed employee a review period, the employee should request 21 days to review the agreement. The employee should use this valuable time to consult an experienced employment attorney about the end-of-employment situation, including any potential discrimination, harassment, retaliation, whistle-blowing, defamation or wage and hour claims that might have been at issue in the employment.
3. The Employer’s Severance Offer May Not Be the Last Word.
If an employee has been fired, terminated, laid off or otherwise abruptly “exited” from her or his job, the former employer may have offered the employee a severance in exchange for a written release on the employee’s way out the door. Some employers do not explicitly offer severance; they act as if the employer has the last word with the termination decision and deactivate an employee’s email and security card before the employee has been escorted out of the building.
However, an employee who is about to be, or who has been, terminated, may be able to persuade the employer to create a severance package where one had not been offered, or to negotiate a better severance package than the one originally proposed by the employer.
4. Request for a Complete Copy of the Employee’s Personnel File.
The employee, or the employee’s attorney, should request a copy of the employee’s personnel file as soon as possible after the termination. The personnel file will contain important information about the employer’s evaluation of the employee’s performance, reasons for termination, and assessment of whether the employee is “eligible for rehire.”
If not represented by counsel, the employee should ask Human Resources if they have a form for requesting a personnel file. If the employer does not require a particular form, the employee, or the employee’s attorney, should invoke the employee’s rights to review his or her personnel file under California law.
California Labor Code 1198.5 states that “every current and former employee … has the right to inspect and receive a copy of the personnel records that the employer maintains relating to the employee’s performance or to any grievance concerning the employee.” The employer must make the employee’s personnel file available for inspection, or provide a full copy, within 30 days. If pressed, the employee is obligated to cover the employer’s actual costs of copying the personnel file.
5. Gather Documents and Prepare a Chronology of Issues that Led to the End of the Employment Relationship.
After requesting the personnel file, the employee can keep legal costs down by collecting and organizing important documents for the meeting with the employment attorney. Important documents include:
an electronic or hard copy of the company handbook;
documents that pertain to the termination and alleged reasons therefore; and
all past performance reviews.
The employee should prepare a chronology of his or her employment history, including dates of hire and any pay or title changes, dates of complaints to a supervisor or to Human Resources, dates of any personal or medical leaves, dates for any requests for accommodation or any other issues that the employee feels may be motivated the employer to end the employment relationship.
6. Hire an Employment Lawyer to Review the Severance Agreement and to Evaluate Any Potential Claims by the Employee.
Hire an employment attorney review the fine print of any severance offer. As the employer is in a powerful position compared to a recently-exited employee, employers may overreach by including potentially harmful provisions in their initial severance offer, such as cutting off pending claims under the company’s health insurance policy, prohibiting an employee who was terminated/laid off from applying for work with the company, its parent company or any of its affiliates, at any time in the future, or by muzzling the employee with a non-disparagement clause. All of these terms are negotiable.
The reviewing attorney not only should evaluate the written severance agreement, but also explore any potential claims or actions that the employee may have against the employer. This is important because the severance buys a release of all claims against the employer. In order to maximize severance benefits, the employee needs to know what, if any, legal claims he or she potentially has, as well as the strength and validity of such claims. Many companies prefer to negotiate resolution of such potential claims at the outset, during severance, rather than letting them boil over into litigation. In 2012 and 2013, retaliation in the employment setting was the leading cause of action filed in California courts.
Remember that the severance is not being offered as a gift, or out of any kindness or gratitude from the company. The company has a very real risk to manage, namely the high cost of potential employment litigation from a wrongfully terminated employee, the extra scrutiny on the company from the state or federal government should the wrongfully terminated employee file an administrative claim of discrimination, harassment or retaliation with the Equal Employment Opportunity Commission, the Department of Fair Employment and Housing, or with the California Department of Labor Standards Enforcement of the Department of Labor, increased insurance premiums for coverage of an employment claim, and bad publicity. An employee who is asked to sign a severance agreement almost always is required to forfeit any and all of her or his employment rights, and to keep quiet about it, in exchange for a severance. As the employer may have violated the employee’s rights in ways that the employee is not aware, it pays to have any termination, with or without a severance offer, to be evaluated by an experienced employment attorney.
7. Develop a Negotiation Strategy.
When negotiating a severance package, it often is better for the employee to keep her or his lawyer behind the scenes, at least at first, for several reasons. Once the lawyer introduces her/himself as the employee’s legal representative, the company cannot speak directly with the employee, and instead must communicate only with the lawyer. Moreover, announcing that the employee has “lawyered up” may put off important people in the company who otherwise might have advocated on the employee’s behalf for a better severance package.
A severance does not have to be a lump sum payment. An employee may be able to increase the dollar value of a severance offer by taking it as a salary continuation rather than as a lump sum payment. While the employee cannot collect unemployment while receiving severance as a salary continuation, the benefit to be gained by keeping the employee on payroll and spreading out payments may outweigh the value of unemployment benefits. Negotiating a salary continuation instead of a lump sum may put the employee is in a better position to ask for more dollars, and to ask that the company maintain his or her health insurance during the salary continuation period. Also, as severance is taxable income, a lump sum payment may push the employee into a higher tax bracket.
8. Make Health Insurance a Priority in the Severance Package.
Under the Consolidated Omnibus Budget Reconciliation Act of 1995, known as COBRA, an employee typically is entitled to continue medical coverage under the company’s plan for up to 18 months. However, the employee will be required to pay the entire premium, which can be enormously expensive, especially for families. Employees can increase the value of their severance at low cost to the employer by negotiating for the company to continue paying for the employee’s health insurance for a period of time. Employees may find additional savings by having the company make direct payments to the insurer.
If the employer provided group life insurance and disability insurance plans, the employee can ask for these plans to be converted to an individual policy for continuity and peace of mind. However, if the employee is young and healthy, he or she might later find cheaper policies on her or his own, or through Covered California.
9. Push for Non-Salary Compensation Options and Benefits.
In severance negotiations, the employee should try to negotiate to keep any unvested interests, such as company matches to a 401(k), deferred compensation, and stock options. Companies rarely will volunteer to vest these conditional interests, but they can significantly add to the value of the employee’s severance package at minimal cost to the employer.
Five years ago, as part of severance negotiations on behalf of a client at a high-tech firm, Lemmon Employment Law & Conflict Resolution negotiated for an extra month of stock vesting. While it wasn’t worth much at the time, the stock has grown immensely in value in a short time. If the employee already received stock as a component of compensation, it is worth an ask.
If an employee regularly received an annual or quarterly bonus as part of his or her compensation package, the employee should negotiate for a pro-rated share for the bonus period in which the employee was terminated.
If the employee has an outstanding loan from her or his 401(k), the employee should make arrangements to pay it back, or the company might automatically treat it as a distribution subject to taxes and possibly an early withdrawal penalty, too. If the employee has unused dollars in a medical flexible savings account, s/he would be wise to use those FSA dollars with a quick trip to the dentist or a new pair of eyeglasses before the end of the year – most plans are use it or lose it.
Other loose ends to tie up in severance negotiations: payment for unused vacation time (employer should pay out unused vacation time on the employee’s last day of work); unreimbursed travel expenses, personal property belonging to the company in the employee’s possession (laptop, cellphone, identity badge) that either needs to be returned or purchased. Many employers will allow employee’s to transfer a frequently used cell phone number to a private account.
10. Ask for a Recommendation, a Going-away Party, and/or Acknowledgment.
Involuntary termination is a painful experience, much like the break-up of significant relationship. Severance negotiations give the employee an opportunity to rewrite the ending of the professional relationship. In severance negotiations, employees can request certain messaging about their departure, public acknowledgement or credit on certain projects, or perhaps for a going-away party. Such non-salary components may be seen as a small “give” by the company, but could have great value for the employee, both in self-esteem and in maintaining cordial relationships with former co-workers.
Employees often ask, and employers often refuse, written recommendation letters. Employers are concerned that an open recommendation letter may expose them to future liability for failure to disclose known information about the employee to a potential future employer. An employee can increase the chances that an employer will accept and sign a recommendation letter by drafting it based on positive comments in past reviews and other official records of the company. If the employer insists that they only will provide future employers with the employee’s dates of employment and job title, request the name of the person in the company who will be responding to any inquiries from future employers, to be sure that the employee can connect a potential future employer directly with the person familiar with the severance terms.
The end of the employment relationship is a difficult time for most employees. Moving through this process with the guidance of an employment attorney who shares your goals (maximizing your severance in a time and cost-effective manner, and minimizing unnecessary litigation) can improve your severance package, and help you move forward with your head held high.