Employee Tip: Things to Consider When Your Employer Offers a Severance Agreement

If you are a Wisconsin employee, and your employer has terminated your job and offered you a severance agreement, you should consider the following things. (Please note this post does not provide legal advice- if you want legal advice, you should contact an attorney and discuss your specific severance agreement and circumstances).

• Consider deadlines, and act promptly.

The moment you are given a severance agreement, check it for a deadline. Chances are, your employer gave you a deadline in which you must agree to, or decline, the severance. If you are 40 years old or older, federal law requires the employer give you at least a 21-day period to review the severance agreement.

If the employer has not given you a reasonable amount of time, or rushes your decision, that is a red flag. An employer who is interested in being fair will understand that you cannot review or make decisions about an important document on a moment’s notice.

If you are being rushed, ask for more time. Make such requests in writing. If you are over 40 and the employer is asking you for a decision in fewer than 21 days, tell the employer (politely, and in writing) that the law requires you be provided at least 21 days.

Review the agreement promptly, and if you decide you want an attorney to review the agreement, make all such arrangements sooner rather than later. You should not wait until the last day before the deadline to review the severance agreement, or wait until that point to decide whether you want to speak to an attorney about the agreement. You should take these steps early on.

• Know that in signing a severance agreement you will be giving up important things: first and foremost, you’ll be giving up your right to pursue any legal claims against the employer.

The main benefit to you in signing a severance agreement is to receive monies and/or benefits provided in the agreement.

The main benefit to the employer is that, in exchange for your receipt of these monies and benefits, you will be signing away your right to bring legal claims against the employer.

Know there may be potential value- sometimes substantial value- in the potential legal claims you are giving up. You may also be giving up other things. For example, a severance agreement may have non-compete terms that prohibit you from working for the employer’s competitors. Thus, when you sign a severance agreement, you may (if there are non-compete terms) be limiting your career options, and you will almost certainly be waiving your right to bring any legal claims against the employer.

When I review a given severance agreement and evaluate that given employee’s potential legal claims, it is often the case that the severance monies’ value is worth more (when all potential monies and risks are considered) than the likely value of any potential legal claims.

However, there are occasions when the value of the potential legal claims far outweighs the value of the monies offered in the severance agreement. In those instances, the employee has more leverage in trying to increase the severance, or has the option to forego the severance and pursue a legal action instead.

If you suspect you have potential legal claims that you may want to pursue and/or use as leverage in severance negotiations, it is probably worth your while to have an employment attorney assess those potential claims, and their potential value.

• Know that the employer did not have to provide you with a severance agreement or severance pay (unless a prior contract exists that requires it).

Unless you and the employer have an employment contract or policy requiring a severance be paid, the employer has no legal obligation to pay you any severance monies when terminating your employment. Accordingly, no matter how unfair your termination may be, do not assume you are entitled to anything, or make demands based on the false assumption you are “owed” a severance.

The employer’s severance offer may seem unfair in light of your years of service, the quality of your work, and other factors. But no matter how unfair your termination, unless you have a preexisting contract or policy requiring you be paid severance pay, the law does not require that you get any severance pay.

Employers know that severance pay is not required, so if you assume you are “entitled” to more pay, the employer may react negatively to any such assumption of entitlement.

• Know the severance terms are negotiable, and can (and in some cases, must) be changed.

Many employees will accept a severance agreement as is, or will assume there is no room for negotiation. Do not assume this. Many employers will negotiate and change terms, especially terms that don’t cost the employer anything to change.

There are instances- for example, when a severance has very restrictive non-compete terms- where you must ask for changes, and may need to refuse the severance altogether if the employer will not change or remove the terms. An employer who negotiates in good faith should be open to hearing your reasonable requests for revisions, and to revising its severance language.

• Consider whether you have leverage (namely, potential legal claims) to negotiate and increase the severance monies offered.

As mentioned, you shouldn’t ask the employer for more money just because you feel entitled to it, or because you feel more money would be more “fair.” However, you should ask for more money if you have legitimate leverage to do so.

An employee’s main form of leverage is the potential legal claims that he or she has. Did the employer fire you unfairly or discriminatorily? Did the employer owe you unpaid wages when you were fired? If the employer caused you to lose income or otherwise treated you unfairly, there may well exist potentially valuable legal claims against the employer. (I have a post here about what types of factors suggest an employee has a “good case”). If you potentially have a good case or claims against the employer, this may provide leverage to negotiate a higher severance payment. An employment lawyer can best evaluate whether you have any potential legal claims, and whether those claims have a potentially significant value.

In many instances (e.g. several workers are laid off for financial reasons and offered severances), there are no viable legal claims because you as an individual were not singled out or treated discriminatorily or unlawfully. If you have no decent potential legal claims, your leverage is probably very limited, and it is likely not worthwhile to ask for more severance monies. If the situation is hostile, it may antagonize the employer to ask for an increased severance payment, whether that request is reasonable or not.

Tread carefully, and thoroughly assess your leverage and strengths before you ask for a higher severance payment.

• Review the severance agreement for penalties or liquidated damages.

Severance agreements usually have penalties that will be applied to you if you breach the agreement. For example, it is common for a severance to (1) require the employee keep the severance (namely, its value or dollar amount) confidential; and (2) require that, if the employee breaches the confidentiality requirement, he or she will have to pay back the full severance value as a penalty.

Another common penalty provision is where a severance requires an employee to pay the employer’s attorneys fees if a court finds the employee breached the contract.

As you review your severance, pay close attention to any penalty provisions. While you may feel (understandably) there will likely be no future disputes over the severance that would trigger the penalties, it is still important you know the penalties up front. If the penalties are particularly strict or one-sided against you, that may tell you that: (1) you’d stand to lose a lot, and the employer to gain a lot, IF the employer pursued and won a breach action against you; and (2) thus, the strict penalty provision may motivate the employer to litigate under lesser circumstances than it would usually take.

• Review confidentiality terms closely, make sure you understand them, and start following them immediately (don’t wait for the contract to be signed first).

Employers are understandably very concerned that the parties keep confidential the severance terms, and namely the monies paid. Pay special attention to the wording of any Confidentiality provision in your severance agreement. Make sure you read all confidentiality language in full, understand it, and do not violate it. A breach of confidentiality- perhaps more than any other type of breach- is likeliest to trigger strict penalty provisions and to motivate litigation.

You should start keeping things confidential well before you sign the severance agreement and before the confidentiality provision officially applies. Once you start talking severance numbers with an employer, you should not be discussing those numbers with others (except with an attorney or others who the severance specifically lists as exceptions to the confidentiality requirement).

You may have former coworkers ask you “Did you settle? How much did you get?” The best answer is no answer. Sometimes, the severance itself will supply you with an answer phrase to respond with, such as “The matter has been resolved.” In any event, do not discuss the severance or its dollar amounts.

• Make sure the severance includes language that does not hurt your prospects of receiving unemployment income.

When you have been fired or laid off from a job in Wisconsin, you are usually eligible for unemployment insurance income. (If you voluntarily resign, you are generally not eligible). However, sometimes the language or terms of a severance agreement can hurt your chances to receive unemployment.

For example, say the severance states that you “voluntarily resigned” when in fact you were terminated. For some purposes (e.g. job-hunting) it may sound appealing to retroactively “agree” with the employer that you “resigned.” However, for unemployment purposes you can be denied unemployment benefits if the State of Wisconsin determines you had in fact voluntarily resigned from your job. Thus if you didn’t resign, it helps to have the employer agree, in the severance agreement, to tell the State the truth that your termination was not voluntary.

For instance, language like this could be included in the severance agreement:

“If Employer is asked, for unemployment compensation purposes, whether Employee voluntarily terminated her employment, Employer agrees it will assert (as is true) that the termination was not voluntary. Employer further agrees that it will not contest Employee’s application or pursuit of unemployment compensation benefits.”

Language like this will help confirm that the employer will not contest your unemployment when they agree you are eligible, and that they will not use terminology that will hurt your chances for getting unemployment (e.g. the employer will not tell the State that your involuntary termination was a “resignation”).

There are other unemployment pitfalls that can arise in a severance agreement, based on its particular terms and language. An attorney could help you spot and address such issues.

• Check how the severance addresses any outstanding monies that may be owed (e.g. bonuses and commissions you’d already earned, vacation pay accrued, etc.), and any benefits that may be owed (e.g. check when the severance says health insurance and pension payments will be discontinued).

When you are notified your job will end, you should find out the status of any remaining monies you may be owed. For example, say you have three weeks of unused vacation pay accrued at the point you are terminated. You should review the severance agreement’s language and see whether it says you will be paid out for this unused vacation time.

If the severance agreement says nothing about whether vacation pay (or earned bonuses, commissions, etc.) will be paid out, you should assume they will not be paid out. Before you sign the severance agreement, you should contact the employer and ask whether these monies will be paid and/or try to negotiate their inclusion into the severance agreement. If the employer says it will pay such monies, you should ask for written confirmation this will be done- ideally, within the severance agreement.

It is also important you review the severance for benefits issues, such as whether health insurance will be provided, at what cost to you, and for how long. You should also check whether 401k and/or pension benefits will be affected by your termination and severance agreement.

If the severance agreement is not clear what will happen with monies and benefits like those above, then before signing the agreement you should talk to an appropriate representative of the employer (probably someone in HR designated as a benefits contact) and get official status on all those issues, and what will happen with them in light of the severance.

• Check the severance language for one-sided or unfair terms.

Too often, a severance agreement (because it is drafted by the employer) contains several one-sided terms that benefit the employer. For example, it is common for a severance agreement to: (1) state that, if a court finds the employee breached the agreement, then the employee (the loser in litigation) has to pay the employer’s attorney fees; (2) but if the employer is found to have breached the agreement, there is no similar requirement that the employer pay the winning- employee’s legal fees.

Similarly, severance agreements often require that (1) employees have to keep the severance terms confidential and not disparage the employer, (2) but do not require the employer to follow any confidentiality or non-disparagement requirements.

Ideally, an employee should try to fix these one-sided terms where possible. That is, to make the terms mutual, or have them removed altogether.

If you are unable to get such one-sided terms changed, then you must decide whether you can live with them. Often, these one-sided provisions, while not ideal, are unlikely to ever come into play as a practical matter and are not important enough to be deal-breakers, so to speak. However, such one-sided terms may be cause for alarm that the employer does not intend to deal fairly with you- particularly if the employer is exhibiting other adverse conduct (e.g. making an unreasonably low severance offer as compared to value of potential legal claims, refusing to allow you time for review, etc.).

If an employer is showing a pattern of questionable conduct, you should be less inclined to accept the severance agreement at face value, and more inclined to review the severance agreement thoroughly, perhaps with an attorney.

• Consider having an attorney review the severance agreement, and whether the cost is worth it.

An employment attorney could provide value by reviewing the severance terms, and also by evaluating your potential legal claims and leverage. This can often be done for an affordable charge. (I charge a flat fee of $175 for a severance review; prior to that in-person review of the contract, I have a free phone consultation with the employee where I evaluate potential legal claims at no cost).

In my opinion, an employee rights attorney should not charge you to talk about your circumstances and tell you whether you have potentially viable legal claims. (Everyday, I have free phone consults with people, and tell them whether I think they have potential legal claims). When it comes to reviewing an actual severance agreement, however, most attorneys (including me) will charge a fee for that work. This is because this work involves reviewing specific legal language and rendering an informed legal opinion based on that particular contract’s language and based on your circumstances.

If your severance agreement does not seem high-risk upon your own review, and if you don’t want to pursue any potential legal claims (no matter how “good” they may be), then you may feel an attorney’s review and costs are not worthwhile. On the other hand, if you were terminated under highly adverse circumstances, you stand to lose substantial monies due to termination, and you may have potentially valuable legal claims, then under these circumstances I’d say it’s highly advisable to invest in a lawyer’s evaluation of the severance agreement and potential claims.

It is usually the case when an attorney reviews severance agreements (at least for me), that the employee-client walks away with several tips for improving the agreement’s value and for avoiding risks. Sometimes, an agreement is very-fairly drafted, avoids almost all the concerns above, and the reviewing attorney has very few tips she can give, other than saying “that’s an acceptable agreement” and providing the associated piece of mind. And sometimes, on less common occasion, the attorney will advise the client to consider foregoing the severance altogether and to pursue a legal claim as the best means to pursue lost monies and damages tied to their termination. Ultimately, only you can decide how thoroughly you want to review things, and whether an attorney’s review is worth the charge.

Hopefully, the information above will be of help to you in dealing with your own severance offer and circumstances. I wish you the best of luck, and hope that the severance and transition to new employment turn out to be- as they often do- blessings in disguise or undisguised.

DISCLAIMER: The information in this blog is NOT legal advice, nor does it establish an attorney-client relationship between you and Employee Rights Attorney Michael Brown or the law firm of Peterson, Berk & Cross. Legal advice often varies between situations. If you want legal advice for your specific circumstances, you must consult with an attorney.

For more information about Wisconsin employment lawyer Michael F. Brown and Peterson, Berk & Cross, S.C., please visit http://www.pbclaw.com/mb.html.

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