How to Negotiate a Severance Agreement: Expert Tips from an Employment Lawyer

Introduction

A severance agreement is a contract between an employer and an employee that outlines the terms for ending the employment relationship. Severance packages often include financial compensation, continuation of benefits, and additional provisions that define what both parties can and cannot do after the employment ends. Understanding the intricacies of a severance agreement can make a significant financial and professional difference for employees.

For many individuals, losing a job is a highly emotional event. However, it is critical to take a step back and carefully assess the severance offer presented by your employer. Learning how to negotiate a severance agreement can be the key to ensuring that you are financially protected during a period of transition. It can also help you manage your career prospects by negotiating favorable terms for non-compete clauses or securing other valuable benefits like health insurance coverage.

Negotiating your severance is not just about maximizing financial benefits; it’s also about safeguarding your future job opportunities, securing health benefits, and making the most out of a challenging situation. This article will provide you with a step-by-step guide on how to negotiate a severance agreement, share the key elements of such agreements, and offer expert legal tips to help you make the best decisions for your future.

What Is a Severance Agreement?

Definition and Purpose

A severance agreement is a legally binding contract between an employee and an employer, established when an employment relationship ends. It typically outlines the terms and conditions under which the employee will depart, including any compensation, benefits, and post-employment obligations. Severance agreements are often offered when a company decides to downsize, restructure, or terminate an employee without cause.

The purpose of offering severance is two-fold: it helps provide the employee with a financial safety net during their job search while also protecting the employer from potential legal disputes. Most severance packages include financial compensation, healthcare coverage continuation, and other support measures, depending on the employee’s role and tenure. Employers also include provisions like non-disclosure agreements or release of claims to prevent future litigation.

Legal Considerations

When properly negotiated and mutually agreed to by both parties, severance agreements can serve a useful purpose in bringing finality to the end of an employment relationship and providing peace of mind to both the employer and the employee. For the employer, that peace of mind is likely to come primarily from a release of claims preventing the employee from suing their former employer, while the employee is likely to receive a sense of financial security through a lump-sum payment or other benefits.

However, it is important to note how these agreements can vastly differ in what they require of the parties. Understanding the legal implications of signing a severance agreement is critical, especially in cases involving non-compete and non-solicitation clauses. These clauses can severely restrict an employee’s future career opportunities. In some states, such clauses are enforceable only under specific conditions, so it’s worth getting advice from an employment lawyer to determine whether these restrictions are reasonable and to potentially negotiate modifications that better serve your interests.

Key Elements of a Severance Agreement

Common Components

A severance agreement is more than just a lump sum payment for departing employees. It’s a comprehensive contract that can include multiple benefits and obligations for both parties. Here are some of the common components you are likely to find:

• Financial Compensation: This is the most well-known part of a severance agreement. It often consists of a lump sum payout or a continuation of salary for a specified number of weeks. The amount is typically determined by the length of employment, role, and company policies.
• Continuation of Benefits: Many severance agreements also include healthcare continuation benefits, such as COBRA. The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires that companies allow former employees to continue their health insurance coverage, usually at their own cost. However, during severance negotiations, employees can sometimes request that the employer cover these costs for a period of time.
• Non-Compete and Non-Disparagement Clauses: Employers often include non-compete clauses to prevent departing employees from working for competitors for a specific period, usually six months to two years. The enforceability of these clauses depends on state laws, and they can limit job opportunities significantly. Non-disparagement agreements, on the other hand, are intended to prevent the former employee from speaking negatively about the company.

Hidden Clauses to Watch Out For

While the core components of a severance agreement might seem straightforward, there can be hidden clauses that could have long-lasting implications for employees. Here are some of the key clauses to watch for:

• Confidentiality Agreements: Most severance agreements include confidentiality clauses, which restrict employees from disclosing details about the agreement or anything that happened during their employment.
• Release of Claims: Often, companies include a release of claims clause in severance agreements, requiring the employee to waive their right to bring any legal claims against the company in the future. This may include claims related to wrongful termination, discrimination, or unpaid wages.
• Rehire Provisions: Some agreements include a no-rehire provision, preventing the employee from ever applying or being re-employed by the company. This type of provision can limit future employment prospects, especially for employees working in industries dominated by a few large players.

Understanding Your Rights

When presented with a severance agreement, it’s essential to understand your rights under state and federal laws. Very often, employees underestimate the value of the severance agreement to the employer. A release of claims by a recently terminated employee may be very valuable to the company, especially if the employee has viable claims against the employer for discrimination, retaliation, or other unlawful conduct.

Employees should also be aware of their rights regarding unpaid wages and commissions. For example, an employer may offer to pay an employee outstanding wages owed to them but require the employee to sign a severance agreement releasing all legal claims against the company. The employee may sign the agreement and fail to realize they were legally entitled to receive that payment without having to give up certain legal rights. Severance agreements fail to include these entitlements, and an employer may attempt to use the severance payment as a replacement for these legally owed amounts. Employees should make sure they understand what they are owed and ensure that the severance payment is above and beyond these entitlements.

Why You Should Consider Negotiating Your Severance Agreement

Benefits of Negotiating

Negotiating a severance agreement can lead to improved outcomes that better support your transition. Here are some key benefits of negotiating:

• Improved Financial Terms: By negotiating, you may be able to increase the amount of severance pay, extend the payout schedule, or secure a lump sum that meets your financial needs during the job transition.
• Healthcare Benefits: Healthcare is one of the most critical aspects of severance negotiations. You may be able to negotiate extended healthcare coverage, allowing you to maintain continuity until you secure new employment or alternative coverage.
• Non-Compete Clauses: The terms of a non-compete clause can be detrimental to your career, especially in industries with limited employers. Negotiating these terms to shorten the duration or limit the geographical scope can provide more freedom for your next role.

Common Myths About Severance Negotiation

There are many misconceptions surrounding the negotiation of severance agreements. Here are two common myths:

• Myth: You Can’t Negotiate a Severance Agreement: Many employees believe that severance offers are non-negotiable. In reality, most employers expect some level of negotiation, especially for employees in senior roles or those with a long tenure with the company.
• Myth: Asking for More Could Lead to Retraction: Many employees also believe that attempting to negotiate the agreement will result in the employer rescinding the offer. While this is certainly possible, in reality, employers rarely, if ever, withdraw their severance offers simply because the employee tried to negotiate, as these agreements hold significant value to the employer in avoiding potential disputes.

Step-by-Step Guide to Negotiating a Severance Agreement

Step 1: Review the Agreement Thoroughly

The first step in any severance negotiation is to take the time to review the severance agreement in detail. Read through every clause to understand what your employer is offering and what they expect in return. Pay close attention to clauses about financial compensation, non-compete agreements, non-disparagement clauses, and confidentiality. If something is unclear, don’t hesitate to seek clarification from the employer or legal counsel.

Employers may include provisions that sound standard but could have a significant impact on your ability to find future employment or speak freely about your experience. For instance, non-compete clauses may prevent you from working in your field for a certain amount of time. Consulting an employment attorney can help you identify problematic terms and determine areas where you have room to negotiate.

Step 2: Assess Your Leverage

Understanding the leverage you have in negotiations is crucial. Leverage could be based on factors like your length of service, your contributions to the company, or even the circumstances of your departure. For instance, if you were a key player in a major project or have specific skills that would be difficult for the company to replace, you are in a stronger position to negotiate better terms.

Performance-based leverage—such as achieving notable milestones or maintaining excellent performance reviews—can also increase your bargaining power. Additionally, if there were any legal concerns surrounding your termination, such as discrimination or retaliation, you may have more leverage to negotiate a higher severance payout or extended benefits.

Step 3: Identify What Matters Most to You

Before you enter negotiations, it’s important to identify what is most important for you. Financial compensation is often the priority, but there are other elements that could be equally or more valuable depending on your circumstances.

• Healthcare Continuation: If you or a family member are in the midst of medical treatment, negotiating extended healthcare benefits can be invaluable.
• Modifications to Restrictive Clauses: Clauses like non-compete and non-solicitation agreements can limit future employment opportunities. Negotiating these terms is crucial if they will restrict your ability to work in your field.

Having a clear understanding of your priorities helps you stay focused during negotiations and allows you to advocate effectively for what matters most.

Step 4: Practice Your Negotiation Pitch

Approaching your employer for a severance negotiation can be intimidating, especially if you have never been in a similar position before. The key to a successful negotiation is preparation. Write down the key points you want to address and practice presenting your requests clearly and confidently.

Use language that emphasizes collaboration rather than confrontation. For example:

• “Given my contributions over the past five years, I feel an extension of healthcare benefits for six months would be a fair addition to the severance package.”
• “I appreciate the severance offer and would like to discuss adjusting the non-compete clause so I can continue working within my industry.”

Being calm, professional, and confident will help you negotiate more effectively and show that you’re committed to finding a solution that works for both you and the employer.

Step 5: Get Everything in Writing

Once you have successfully negotiated any changes to your severance agreement, make sure that all modifications are documented. This ensures there is no confusion later and that both you and the employer are on the same page. Before signing, carefully review the final version of the agreement to confirm that all negotiated changes are accurately reflected.

If there is any uncertainty about the agreement, ask for time to consult with a lawyer. Having everything in writing also prevents any misunderstandings or disputes that could arise after your departure, providing you with the peace of mind that you are leaving on agreed-upon terms.

Common Pitfalls to Avoid When Negotiating a Severance Agreement

Signing Without an Attorney's Review

One of the most common mistakes employees make when presented with a severance agreement is signing it without having an attorney read through the agreement's terms. Severance agreements are often filled with complex legal language and provisions that may limit your rights in significant ways. For example, by signing a release of claims, you may be giving up your right to bring a lawsuit against your former employer for wrongful termination or discrimination. It’s crucial to have an employment lawyer review the agreement to ensure you fully understand the implications of each clause. Taking the time for a legal review can help you avoid inadvertently waiving valuable rights and protect your best interests.

Not Understanding Non-Compete or Non-Solicit Clauses

Another major pitfall is failing to understand how non-compete and non-solicit clauses might impact your future job opportunities. Employers often include these restrictive covenants to prevent you from working for a competitor or soliciting clients or employees after your departure. Depending on the industry and state you live in, these clauses can be highly restrictive and enforceable, potentially limiting your ability to find new employment. If the non-compete clause is too broad, negotiate to reduce the scope, duration, or geographic area covered. Otherwise, you may find yourself unable to work in your field for a considerable period of time, which could have serious financial consequences.

Letting Emotions Take Over

Negotiating a severance agreement can be an emotional process, especially if you were not expecting to lose your job. It’s natural to feel anger, frustration, or sadness, but letting these emotions take over can be detrimental to your negotiations. The best approach is to remain calm, professional, and focused on the facts of the situation. Emotional reactions can lead to impulsive decisions, such as rejecting a fair offer or making demands that are unrealistic. Instead, take some time to process your emotions before entering negotiations, and consider enlisting an attorney to provide an objective perspective.

When to Seek Legal Help with Severance Negotiations

Signs You Need an Employment Lawyer

There are certain situations where seeking legal help is highly recommended, if not essential. If your severance agreement contains complex clauses, such as a release of claims that could impact your ability to pursue legal action, or restrictive covenants like non-compete agreements, a lawyer can help clarify your rights and the risks involved. Another key sign you need legal help is if you suspect that your termination may have involved discrimination, harassment, retaliation, or any other illegal action. An employment lawyer can help you determine whether your severance package is fair given the circumstances and can negotiate on your behalf to secure a better deal.

Benefits of Having an Employment Lawyer on Your Side

Having an employment lawyer during negotiations can significantly improve your chances of getting a more favorable severance offer. Lawyers understand the legal nuances of severance agreements and can often spot problematic clauses that an employee might overlook. Additionally, a lawyer can negotiate directly with your employer, which can help take some of the emotional burden off of you and lead to a more effective negotiation.

If you're involved in a severance negotiation and need professional assistance, consider reaching out for help. Contact me today to schedule a consultation and ensure you get the best possible terms for your severance agreement.