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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 was reached. But 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 considered. 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 employers in certain circumstances to provide statistical information to older employees adversely effected by a reduction in force and that certain very specific provisions be included in any severance agreement before it will waive an employee's right to file an Age Discrimination lawsuit. 29 U.S.C. 626(f)

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 and what particular procedures have to be followed to effectuate it. In the absence of a written contract, in nearly every American jurisdiction the employment relationship remains terminable at will. Some states recognize exceptions to this rule where the termination is in violation of a strong public policy (such as reporting employer fraud to government officials, or serving on a jury). Other states recognize an implied covenant of good faith and fair dealing in any employment contracts and there are wide variety of other legal theories that provide grounds for possible termination lawsuits 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, assessed and evaluated, the second step is to evaluate what, if anything, the employee is legally due upon termination. I am aware of no state that requires as a matter of law that any severance payment be made at all. Some companies have severance policies which may or may not be legally enforceable as either a contract or an employee benefits plan. 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 only means that the employee can elect to continue coverage for 18 months by paying the entire cost of coverage. Stock option rights 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. Knowledgeable employers will typically condition any additional compensation it offers to the terminated employee upon the employee's execution of a release absolving the company and its managers from any legal claims arising from the termination. Although the these packages normally suggest that the employee consult an attorney before signing ( this language is required by the Older Workers Benefit Protection Act), the provisions and severance payments are normally presented on a take it or leave it basis. This does not preclude the negotiation of increased compensation for the release 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 are completed can an proper evaluation be made as to whether the severance package being offered is sufficient to justify waiving the right to sue the employer for the termination or any other claims the employee may have. If the employee has viable legal claims, additional compensation can usually be secured. Indeed, in some cases it is advisable to reject the offer and initiate litigation. If the employee has no viable claims, the offer may 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 have generally been successful in securing compensation beyond that initially offered for employees and in preventing litigation for employers. We charge clients our standard hourly rates for this representation

The loss of employment will probably be the most traumatic event a contemporary employee will encounter in his or her career. Unfortunately, it is becoming an all too 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 explore the possibility of providing these services on your behalf.