Severance Negotiations

A Primer for Executives Facing Termination

One of the unfortunate byproducts of increased global competition is the demise of job security for the American worker. A generation ago most employers rewarded longevity with an intense effort to ensure that their employees where kept on the payroll until normal retirement age. Businesses tended to last longer in those days and the entire working environment was far more stable. Today, unless one is represented by labor organization or had sufficient leverage to secure a contract providing employment guarantees, there are no promises for continued employment regardless of the level of past accomplishment. As a result, one of the legal services we offer with increasing frequency is severance negotiations, primarily on behalf of the displaced professional or executive, but also for companies who seek to separate personnel equitably and with a maximum degree of protection against subsequent litigation.

Step One – Determining the Facts and Assessing any Potential Legal Claims

The first step in handling an employment severance matter is an evaluation of the pertinent facts to assess potential legal liability. If the employee is over the age of 40 the viability of a claim for Age Discrimination should be assessed. The possibility of sex, race, disability or other forms of prohibited discrimination should also be examined. It should be recognized from the outset that these claims are very difficult to prove and it is rare that a viable claim is actually presented. As the courts repeatedly advise when they grant employers summary judgment on these claims, the burden is always on the plaintiff to prove that the protected attribute motivated the termination. An employer’s explanation that corporate reorganization, a change in management, a need to reduce costs, or virtually anything else caused the termination will suffice to rebut any presumption that may arise from the fact that younger and employees outside the plaintiff’s protected class were retained. Still, the Older Workers Benefit Protection Act does require that certain very specific provisions be included in any severance agreement before it can waive an employee’s right to file an Age Discrimination lawsuit. 29 U.S.C. 626(f) That law also requires employers in certain circumstances to provide statistical information to older employees adversely affected by a reduction in force.

The applicable contract and tort law of the particular jurisdiction governing the employment relationship should also be reviewed to determine whether any legal claims may arise from the termination. In the absence of a written contract, the basic American rule is that the employment relationship remains terminable at will. Some states recognize exceptions to this rule such as where the termination is in violation of a strong public policy (such as reporting employer fraud to government officials, or serving on a jury). Some states recognize that an implied covenant of good faith and fair dealing is present in any employment contract. A wide variety of other legal theories possibly¬† provide grounds for legal claims arising from termination in various jurisdictions. Even in the states that recognize such claims, however, the employer’s conduct normally must be fairly egregious to set forth a viable claim.

Step Two – Determining Severance and Contractual Entitlement

After potential legal claims arising from the termination have been identified and assessed, the second step is to evaluate what, if anything, the employee is legally due upon termination. State law almost never requires that any severance payment be made. Some companies have severance policies which may or may not be legally enforceable as either a contract or recognized employee benefit. All states require that wages earned prior to termination must be paid; some require this on the date of termination, others on the next regular payday. Some states require accrued vacation to be paid; others do not. Additional questions typically arise where commissions or substantial bonuses were part of the employee’s compensation. Benefit issues are generally governed by federal law. By definition, vested benefits cannot be forfeited, but employees must meet the conditions in the plan documents in order to receive the benefits and these can very well be years away. Health benefits can be continued under the COBRA provisions, but this requires that the employee can elect to continue coverage for 18 months by paying the cost of coverage. Possible stock option rights must also be examined. These are governed by the terms of the particular stock option agreements.

Step Three – Severance Negotiations

Most employers will offer a severance package that includes the employee’s basic entitlements, and some additional compensation to ease the transition. In addition outplacement assistance may also be offered. Employers typically require the employee to execute a release absolving the company and its managers from any legal claims arising from the termination or their employment in order to receive any severance benefits beyond those that are contractually required. The packages normally suggest that the employee consult an attorney before signing because this is required by the Older Workers Benefit Protection Act. The release provisions and severance payments are normally presented on a take it or leave it basis. This does not preclude the negotiation of increased compensation if the employer believes that litigation is probable.
The third step in the termination process is the negotiation of a severance package and release that is in the mutual interests of the parties. Employers need to bring closure to the separation and to minimize the possibility of being sued because of it. The employee needs to secure as much compensation as possible to hedge against the loss of income. Only after a thorough assessment of the employee’s legal rights and legal claims is completed can an proper evaluation be made as to whether the severance package being offered is sufficient to justify waiving any legal rights the employee may have. If the employee has viable legal claims, additional compensation can usually be secured. If the claims are strong ant the employer is unwilling to increase the severance compensation Indeed, it may be advisable to reject the offer and initiate litigation. If the employee has no viable claims, the offered severance¬† should be accepted.

At Adam J. Conti, LLC we regularly advise both employees and employers on the rights and legal risks arising from termination. We assess terminations for legal claims, evaluate those claims, negotiate severance packages and draft and revise severance agreements. We also litigate claims arising from termination where no agreement is reached. We charge clients our standard hourly rates for this representation.

The loss of employment is certainly a very traumatic event. The economic reality is that it is a common occurrence. The best response is from a knowledgeable and informed perspective, with advice and representation by well respected and experienced legal counsel. Legal counsel must be prepared to aggressively negotiate the best severance package, as well as to proceed with litigation if agreement is not reached.

Please contact us for further information or to retain our services in severance matters.

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