If you recently received a severance offer, you are likely wondering if it is fair. Many employers choose to offer severance agreements to their employees, but there is generally no requirement that they offer severance pay. A severance agreement is a contract, so it is important to understand your rights and obligations before signing.
At Robert A. Klingler Co., L.P.A., we review these agreements to ensure your hard work is respected. There are many important aspects to consider when you are offered a severance agreement, many of which are discussed in more detail below.
What Severance Pay Is Meant to Do
Severance pay is compensation an employer offers when ending someone's employment, usually in exchange for a signed release of claims. Severance offers are more common during lay-offs or reduction in force situations and less likely when an employee is terminated for performance or disciplinary issues. Unless your contract, an offer letter, or a company policy promises severance, your employer can decide whether to offer it at all, and how much.
The amount of severance pay and the terms of the agreement can vary widely depending on your position with the company. A departing executive might receive many months of pay and continued benefits, while a rank-and-file employee might be offered two weeks of pay and nothing else. The amount of severance pay is not the only factor you should consider when deciding to sign a severance agreement.
The Core Components of a Strong Severance Package
Determining the value of an offer requires looking at the complete picture. The agreement is likely to include a mix of financial compensation and professional protections:
Severance Pay Based on Tenure: While basic agreements may offer one to two weeks of base salary for every year worked, executives and high-level professionals may be able to negotiate for more. Longer service at the company generally provides a stronger foundation for a larger payout, but newer employees may be able to negotiate severance agreements in some circumstances.
Bonus and Commission Pay: When evaluating a severance offer, you should think about what other forms of pay you regularly receive on top of your base salary. If your pay plan features commissions, bonuses, or stock options, a good severance agreement should take these additional pay sources into account and compensate you accordingly.
Timing and Form of Payment: Your employer may offer severance pay in a lump-sum payment or in a series of payments, such as on the bi-weekly payroll schedule. The pay may be offered to you in the form of W-2 wages or 1099 income. The form and timing of severance payments have different tax burdens that should be considered during negotiations.
Health Insurance and Benefits: If you receive health insurance through your employer, staying covered during a career transition is critical. A strong offer will have the employer cover the cost of your COBRA health insurance premiums for the duration of your severance pay period, rather than leaving you to pay the full amount out of pocket.
Outplacement Services: Some larger companies may pay for a professional career counseling or outplacement firm to help you update your resume and find your next role quickly.
Red Flags Worth a Closer Look
While it is always a good idea to have your severance agreement reviewed by legal counsel, there are some specific terms that should prompt you to slow down and ask questions before signing:
An Exploding Offer: Pressure to sign immediately in exchange for a slightly larger payout, or a very short deadline that does not allow time to have the agreement reviewed.
Overly Broad Releases: Provisions asking you to waive claims completely unrelated to your job, such as claims involving your personal investments, property, or family members.
No Explanation for the Calculation: A lack of clarity or a refusal to explain how the specific severance amount was determined.
Buried Restrictive Covenants: New non-compete, non-solicitation, or confidentiality terms that were not a part of your employment offer buried deep in the fine print that severely limit your future employment options.
Discrepancies in the Separation Reason: References to a reason for termination that does not match what you were previously told, which could negatively affect your unemployment eligibility or future job prospects.
What you May be Giving Up by Signing
If you suspect your termination is related to age, disability, whistleblowing, family leave, or another legally protected reason, the severance agreement may be an attempt by your employer to resolve a claim before it is ever raised. In that situation, you are signing away your right to sue the company for wrongful termination or discrimination. The value of the offer must be weighed against the potential value of that legal claim, rather than just against a standard multiple of your salary. You must ensure the compensation is valuable enough to justify the waiver.
Key Areas to Negotiate
You do not have to accept the first offer your employer puts in front of you. Severance agreements are legal contracts, and contracts can be negotiated. When entering negotiations, pay close attention to these elements:
Characterization of Termination: Ensure the departure is recorded in a way that does not bar you from collecting unemployment benefits if you qualify.
Mutual Non-Disparagement: You should negotiate for a clause that prevents the company or its managers from saying negative things about you to future employers, protecting your professional reputation.
Neutral References: Securing an agreed-upon neutral reference ensures that when future employers call your former company, they will only receive your dates of employment and job title.
Refining Restrictive Covenants: A fair negotiation can refine, loosen, or completely eliminate non-compete and non-solicitation restrictions so you can readily find a new job in your field.
Questions to Ask Before Signing
Before agreeing to any severance package, consider asking how the severance amount was calculated and whether your health insurance or other benefits will continue. You should also ask if you are giving up unemployment benefits by accepting the terms, and whether the agreement includes or expands any non-compete or non-solicitation covenants. Finally, clarify exactly what claims you are releasing, find out if the deadline is flexible, and request more time if you need it.
Why Legal Review Matters
Severance agreements are drafted by the employer, for the employer's benefit. The release language is often broader than most people expect, sometimes covering claims the employee does not realize exist. Once you sign a severance agreement, it is incredibly difficult to undo. If you sign an agreement you do not understand and unknowingly breach its terms, you may be liable to the company for monetary damages.
A legal review can identify whether the pay and benefits offered are reasonable for your position and tenure, whether the release language is appropriately limited, and whether any new restrictions are enforceable. In many cases, an initial offer is not final. Employers often have room to negotiate on the severance amount, benefit duration, or the scope of a non-compete, particularly if you have a potential legal claim against them.
Protect Your Career & Financial Future
Serving Cincinnati, our firm employs a personalized approach, ensuring each client's interests and goals are comprehensively addressed. Whether negotiating non-compete and severance agreements or litigating employment-related issues, we are prepared to advocate relentlessly for our clients. Our commitment is to understanding each client's unique situation and applying our extensive experience to provide strategic and effective legal solutions.
Do not sign away your rights without understanding the full value of your agreement. If you have been offered a severance package, contact Robert A. Klingler Co., L.P.A. online or call (513) 650-6270 today. We offer virtual consultations to review your document, explain your options, and help you secure the package you deserve.