Severance Agreements and Severance Packages

A severance agreement is a contract between an employee and an employer detailing the terms of the employee’s termination. The agreement and benefits form a severance package.

This page gives a broad overview of the legal requirements for severance agreements. Employment laws vary by state. We suggest consulting an employment attorney in a city near you to give you the best advice about your unique circumstances.

How To Negotiate a Successful Severance Package

Since a severance agreement is a contract, it is possible to negotiate the agreement’s terms. You are not required to accept the deal the employer initially offers. As with other types of contracts, the help of experienced counsel can influence the terms of the agreement.

No federal law requires an employer to offer severance packages to laid-off employees under all circumstances. However, some states require severance pay for large layoffs.

Additionally, internal company policy (as contained in your employment contract) could entitle you to severance benefits. You should check with your human resources department for information about your company’s severance policy.

Offering a severance package is often in an employer’s best interest. A severance package lessens the blow to employees with years of service at the company. It can also protect the employer against the former employee disclosing confidential company information. A severance package can also lessen the possibility of a lawsuit by a former employee.

What Terms Can You Negotiate in a Severance Package?

An employer may be motivated — or in some cases, required — to provide a severance package. This can help with negotiating a severance package. The following are some of the items that you can negotiate as a part of the package:

• Many employees want the severance agreement to explicitly state that they chose to resign. Then, they can tell future employers they left the job of their own free will.
• Compensation is the top priority for many employees to negotiate in a severance package. Most often, this includes receiving regular pay for a specific period of time or a lump-sum payment. The amount of severance sometimes depends on years of employment.
• Laid-off employees can receive COBRA insurance coverage to extend their health insurance. Since COBRA is expensive, you may want your employer to continue paying its share of health care premiums.
• Employers may be willing to pay for job placement, training, resume writing, or other outplacement services to help you find a new job.
• Some states require employers to pay you for unused vacation time. Many employers will do so even if not required. You should ensure the severance agreement accurately reflects unused leave time.
• Departing employees may have a limited amount of time to exercise their stock options after leaving. However, it may not be the ideal time for you, given market conditions. By negotiating an extension to 90 days, you can put yourself in a better position.

Employers find it beneficial to remain consistent on the financial aspects of severance agreements. However, that should not dissuade you from negotiating for the best possible severance package.

The Pros and Cons of Signing a Severance Agreement

You must consider what you are giving up by signing the severance agreement.

The employer often wants you to give up certain rights in exchange for the items mentioned above. Think about if what you are receiving justifies giving up the following employee rights:

• The employer will likely want you to release the employer from future claims.
• The employer wants you not to disclose sensitive information or the details of the severance package with a non-disclosure agreement (NDA).
• A severance agreement often includes a non-compete clause restricting you from working for a competitor.
• In some circumstances, a severance agreement can affect your eligibility for unemployment insurance.

You need to consider the following carefully:

• If you want to work for a competitor

• The possibility of taking legal action against the former employer
• Whether you will need unemployment benefits to pay the bills

Can You Refuse To Sign a Severance Agreement?

You are not obligated to sign a severance agreement. The employer cannot force you to sign it. You may refuse to sign a severance agreement if you believe it is not in your best interest. However, an employer can legally withhold the severance payments or the lump sum payout if you refuse to sign the agreement.

You need to consider your personal financial and employment situation when deciding whether to sign a severance agreement. If you want to work for a competitor or have a valid legal claim against the employer, it may be in your best interest to refuse to sign the waiver of claims.

How Long Do You Have To Decide to Sign a Severance Agreement?

State law may require the employer to give you a review period to consider whether to sign a severance agreement. Some states also impose a period when you may revoke your contract acceptance. For example, Illinois requires a 21-day review period and a seven-day revocation period.

Some states only provide these protections to specific groups. For instance, New York has a 21-day review period for employees over 40.

Can You Get Legal Advice on Severance Agreements?

Before signing a severance agreement, make sure you understand your rights and legal options. You can have an experienced employment lawyer review the agreement to help you decide and determine what rights you are giving away by signing.