Understanding a Severance Package
Losing a job, especially when unexpected, is a nightmare for most employees. Worrying about finding another job, paying bills, and covering health insurance premiums between jobs stresses any employee who has been terminated or laid off. Fortunately, you can reduce these fears by educating yourself on severance pay basics long before the need arises. Arm yourself with knowledge so that you will know how to respond if the worst occurs. Many employees have been led to believe that severance packages are rare, but according to a recent study, 97 percent of U.S. businesses reported offering some form of severance to workers.
While Texas does not legally require employers to offer severance pay, there are a number of facts and bargaining chips that can work in your favor when negotiating a severance package.
First, we’ll explore why an employer would offer to pay severance when it does not have to.
Some companies claim that severance is meant to assist employees with their transition out of the company and to help them while they look for another job. That might be true, but there’s also a less altruistic reason for the gesture. Severance packages generally boil down to the employer paying you in exchange for two things:
- Your agreement to not sue the company for any employment-related legal claims you may have, such as workplace discrimination; and
- Your agreement to restrictive covenants, such as non-competition, non-solicitation and confidentiality or non-disclosure provisions that may limit your future employment.
It’s important to keep in mind that these agreements often stem from negotiations, and that negotiations are a two-way street. Here are several legal agreements that protect employers after termination of an employee that you can leverage into an improved severance package:
A liability release releases your employer from liability for things like wrongful termination, discrimination, retaliation, harassment (and more). This is essentially a promise “not to sue” and provides a substantial amount of negotiating leverage.
Nearly all severance agreements will require you to sign this type of release, regardless of whether claims you know about at the time you sign the agreement. The agreement likely will list several sources of such claims, including, for example,
- Title VII of the Civil Rights Act
- the Americans with Disabilities Act
- the Equal Pay Act, the Age Discrimination Employment Act
- the Family and Medical Leave Act, and
- the Employee Retirement Income Security Act
These laws protect employees from discrimination and retaliation by employers based on race, ethnicity, gender, religion, disability, and age or protect employees’ rights to medical leave and certain retirement and health insurance benefits.
If you have been experiencing issues at work, such as discrimination, wrongful suspension, or wrongful termination, contact us for a free consultation with our legal team.
An employer generally will require you to waive claims under these laws before paying severance so that it can achieve finality in its employment relationship with you. But, to hold you to the waiver, the employer must give you what is called “consideration” in exchange for the waiver. Typically, the “consideration” is in the form of a severance payment. It is important, and in some instances required by statute, for the employer to give you time to evaluate the waivers. You should consider speaking to an attorney to discover whether you have a real claim under any of these laws before waiving your right to sue for any claims you may have against your employer.
Some claims, like claims for unpaid wages and overtime under the Fair Labor Standards Act (FLSA) or for unemployment compensation, cannot be waived at all or can only be waived in limited circumstances.
The average lawsuit could cost a company more than $10,000 in legal fees alone, so a liability release provides significant cost savings for an employer (savings that should translate to an improved severance package for you).
Your employer will also want to protect its competitive advantage by having you agree to restrictions on your future employment – particularly if you had access to your employer’s trade secrets or other confidential information. These restrictions often come in the form of non-disparagement clauses, non-competition or non-solicitation agreements, and confidentiality or non-disclosure provisions.
A non-disparagement clause protects your employer’s reputation by restricting you from saying negative things about the company, its officers, directors, or employees, post-termination. Your willingness to protect your employer’s reputation with a non-disparagement clause could serve as an effective negotiation tactic.
A non-compete or non-solicitation agreement protects your employer’s business advantages by ensuring you will not poach clients, compete with their business, or recruit fellow employees to work for a competing company. A non-competition agreement may severely limit your ability to work in the industry for broad geographical areas or for long periods of time, which might make it difficult to obtain another job in your field.
Non-solicitation provisions usually prevent the employee from soliciting either (1) other employees and/or (2) customers, clients, or vendors of the employer. These types of provisions may prevent you, for example, from selling to your current customers, even if you brought them to your employer.
Employers should offer severance that is in proportion to the restrictions they want to place upon you post-employment. The more restrictive a non-compete or non-solicitation agreement, the more your employer should be offering by way of severance. You should make certain you understand the consequences of signing an agreement containing a non-competition clause before you sign it.
A confidentiality or non-disclosure agreement protects confidentiality, trade secrets, and other important company information. The agreement the employer wants you to sign may have a very broad definition of the information the employer considers to be protected. You should make sure you understand the scope of the information you are being asked to keep secret before you sign the agreement. Employers have a strong interest in protecting business secrets and should incentivize employees financially for compliance with non-disclosures.
A word of warning: Restrictive covenants and confidentiality agreements may also be found in contracts you signed when you began working for your employer or at some other time during your employment. These agreements should be reviewed together with the severance agreement so you get a complete picture of your future employment restrictions and options. Regardless of whether they are contained in the severance package or in a prior agreement, non-competition and non-solicitation agreements generally must be limited in time, in subject matter, in scope, and geographically.
Useful Advice for Negotiating Severance Pay
- If you are over 40, you have the right to take 21 days to review a severance agreement under Federal law. Regardless of your age, it is always a good idea to ask for time to review any termination agreementsoffered by your employer.
- Executives and CEOs typically demand 6-12 months of severance pay. If you held an executive title or worked with the company for a long time, you could (and should) leverage that information during negotiations.
- Money is not the only thing you can negotiate. Consider requesting other perks, such as an extension of benefits, stock options, assistance finding a new job, removal/reduction of non-compete restrictions, and positive references(just to name a few). Putting “all your eggs in one basket” weakens your negotiation stance and overlooks other benefits that can be just as important as money when you are facing unemployment.
- When calculating severance pay, make sure you take into consideration any unpaid wages and overtime, as well as accrued vacation and paid leave. Do not leave any un-paid income on the table.
Protect Yourself (& Your Family) While You Search for New Employment
If you have already received a termination notice, you will want to arm yourself with an experienced severance negotiator who can help you negotiate a severance that works for you.
As Texas employee lawyers, we understand just how scary losing a job can be. Our lawyers have been providing severance pay representation and advice to Texans for more than 30 years because we believe every employee deserves a fighting chance.
If you’re asking how to improve your severance package, contact Jackson Spencer Law for a free consultation.