Severance pay is money paid by an employer to a departing employee in exchange for the employee’s promise not to sue the employer. Often departing employees are also required to cooperate in the transition. Here are the basic components of a typical severance package:
Money paid by the employer to the departing employee (typically the amount is expressed in weeks or months of salary)
Continuation of benefits provided to the employee for a set period
A release of all potential claims an employee may have against the employer
Confidentiality agreement (employee promises not to tell anyone about the terms of severance agreement)
Promise by the employer not to contest the employee’s application for unemployment benefits
A set end date of employment
Procedure for handling employment references
A promise by the employee not to disclose any confidential company information
Mutual non-disparagement agreement
Why Should You Sign a Severance Agreement?
People sign severance agreements because they need the money and benefits provided. However it is possible to increase the amount of severance pay by negotiating more favorable terms.
Six Key Points to Consider when Reviewing a Severance Agreement
1. What is the severance pay schedule? Many companies will propose a payout in 30 or 45 days after execution of the agreement. There is no reason to wait that long and companies will often shorten the payout date to 10 or 15 days upon request. Also, companies often propose a payout over time that basically keeps you on the payroll for a period of time. A Lump sum payment is preferable because you get all of the money immediately. Payouts over time can be disrupted if something comes up – avoid these potential issues by getting a fast upfront payout.
2. Are outplacement services offerred? If so, determine if you need those services. Most people do not want them anymore. If you don’t need those services, ask to have the cash equivalent.
3. Are the severance payments subject to a mitigation offset? For example, if you get a new job within a certain time frame, are you required to pay back an amount or have the payments reduced? Obviously you want to avoid any offsets if you find a new job. If an offset clause is included in your agreement, ask to have it removed. Companies usually agree to do this. The point of a severance package is to end the relationship so why create new ties.
Here is a clause that covers mitigation and offsets:
“The Executive is under no obligation to seek other employment and there shall be no offset against any amounts due to her on account of any remuneration or benefits provided by any subsequent employment she may obtain.”
4. Is there any money owed to you that is independent of the severance package? For example, are expense reimbursements owed or a pending bonus? These payments should be recognized in the agreement. If you know that certain expenses are due, run a report and show it to your employer so the amount owing is known and if any questions arise, try to solve them immediately. Also, if an accrued bonus is due, make sure you put up a good fight to get the bonus paid. The bonus is not part of the severance if it has already been earned. Companies often try to exclude bonuses.
Here is a clause that covers any unreimbursed business expenses:
“Within 15 days of the Separation Date, the Company shall pay to the Executive any expense reimbursements due to the Executive as of the Separation Date pursuant to the applicable plan, program or practice of the Company.”
5. Benefit Continuation. If the company has offerred to continue your health insurance, will this be accomplished by continuing the existing insurance plan or by COBRA reimbursement? This should be set forth clearly in the agreement. If the company has not offerred to extend benefits, you should ask them to do so. Ask to have the benefit continuation mirror the severance period (if the severance offer is 4 months ask for 4 months of continuing health insurance).
6. Job Reference. What type of reference will the company provide to you? If they will agree to a letter of reference, have the letter prepared and attach it to the agreement. Or if a letter cannot or will not be prepared, set out the terms of the reference in the agrement as in this sample.
“The Company agrees to supply a neutral reference letter that includes the Executives title, dates of employment, salary and the reason for separation as resignation.”
When are Severance Pay Offers Made?
Companies typically only offer severance pay as part of a termination. Normally, the employee is advised that their employment will be ending and at that time they are provided with a proposed severance or separation agreement. If you are over 40 years old, you will have 21 days to consider the offer and have a 7 day window to revoke your agreement after signing it.
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