While most employers provide severance packages, these post-termination arrangements are not required under the Fair Labor Standards Act (FLSA). Executives generally have significant leverage to negotiate a severance package because of the financial and personal contributions made to the company over the period of employment. Unlike an at-will employment arrangement, an executive initial employment agreement may contain provisions outlining a severance package upon termination of employment. The initial employment agreement may include the types of benefits, obligations and restrictions an executive is subjected to following termination. Because many executives are financially invested in the company, they are typically in a better position to negotiate a more desirable severance package than other employees.
A severance agreement typically covers a variety of financial and legal issues that have an influence on both the employer and executive. In terms of financial benefits, a severance agreement is either paid out in lump sum or through a salary continuation. In general, severance pay is calculated based on the executive’s salary and does not include bonuses, incentive pay or commission pay. This is one area an executive may want to negotiate, as some executives may rely heavily on commission or incentive pay. Generally, benefits terminate when a lump sum is paid, but continue through the salary continuation period. In a salary continuation scheme, an employer will continue to pay health and medical benefits on the same terms as during employment. During a negotiation, an executive may want to extend the continuation pay period until he or she secures a new job.
An employer may choose to create a severance policy covering executives by group. On the other hand, a company may opt to provide executive severance through individual employment contracts, or individual severance agreements. In such a case, it may be easier to negotiate a better deal because there is no standardized severance package. Employers will likely insist on a confidentiality clause within the severance agreement to prevent other employees from becoming aware of the details of a specific package. This is often the case for executive severance agreements, when an employer has agreed to offer extended benefits to one executive, but not another. Further, an executive who has received any deviation from a standard severance package will likely be asked to keep the terms of the agreement confidential. While there is little room to negotiate on this issue, an executive may ask for some exceptions to the clause. For example, an executive may wish to inform his or her professional advisors, such as an attorney or financial planner, of the terms of the agreement. Moreover, the executive may ask for an exception to the confidentiality clause as to immediate family members. Confidentiality clauses ultimately function to make it more difficult for other executives to learn of enhanced severance terms for certain executives.
In addition to a confidentiality clause, an employer will insist on a release of any and all legal claims the executive may have against the employer, or any of its agents or representatives. Upon signing a severance agreement, an employee’s right to a legal claim typically disintegrates. Because of this, it is essential to evaluate any potential claims against the employer before signing the agreement. Severance benefits are typically viewed as an exchange for release of claims against the company. In addition to release of claims, an executive may want to negotiate the terms of a restrictive covenant, if applicable. In some cases, a restrictive covenant may have been previously agreed to in an initial employment contract. For executives who had previously agreed to the terms of a restrictive covenant or non-compete, negotiation is essential to ensuring an employer does not unduly restrict an employee’s future work. An executive may attempt to narrow or eliminate the terms of the non-compete agreement during severance negotiation. If an executive cannot remove the terms of a non-compete, he or she should negotiate for continued pay for the duration of the restrictions.
Because financial and legal issues are often the most significant components of a severance package, other issues may be overlooked. For example, an executive may ask the employer to agree on a reference letter for future employment. An executive may even draft a copy of the reference letter for the employer to look over and make changes to. In the event a reference letter is drafted and agreed upon, the executive should ask the employer to attach a copy of the letter as an exhibit to the severance package.
Executives have significant leverage in negotiating a better severance package following termination of employment. Because executives often have a considerable financial stake in the company and inside business information, employers generally are more willing to negotiate the terms of the package. For an employer, a release of legal claims is viewed as the most important element in the package. On the other hand, an executive is likely most concerned with the financial and medical benefits the package offers. While employees are encouraged to negotiate severance agreements, not all employees do so. It is imperative to consult with a professional regarding the terms of the severance package because of the implications the package may have on future financial and legal issues.