Losing your job? What you should know about severance agreements
If you have just learned that you are being let go from your job, your head may be spinning. So, when your Human Resources manager slides a severance agreement across the desk, it isn’t an ideal time to sign a legally binding document. Take a pause to understand the agreement and weigh your options.
A severance agreement, also called a separation agreement, is a contract that offers you compensation and other benefits (e.g., job placement services) in exchange for your promise not to sue them. The agreement typically includes terms like your compensation and benefits, in exchange for a waiver of claims, meaning you are agreeing not to sue for wrongful termination, discrimination or other possible reasons. The agreement may also include a non-compete clause and provisions about confidentiality and non-disparagement, which must comply with Colorado law to be enforceable.
An employer is generally not obligated to offer a severance, in the absence of a pre-existing contract requiring them to do so. But if they do, the employer usually agrees to pay a portion of the employee’s salary based upon factors like their time in service and their position. The amount can vary widely. The agreement must be supported by new “consideration,” which means the employer is agreeing to provide you something more, like money you are not already owed.
Take time to understand the severance agreement
You are not obligated to accept a severance agreement on the spot – or at all. The employer should give you a reasonable time to consider the severance offer. Federal law requires at least 21 days for you to consider it if you are 40 and older and the employer wants you to waive a claim for age discrimination under federal law. This review period gives you time to consult with one of our employment attorneys and a tax advisor to understand the terms and think about any next steps.
Read and make sure you understand every word of the document. Once you sign this severance agreement, you are bound by its provisions, which could have weighty legal and tax ramifications.
Sign, walk or negotiate?
After you have carefully reviewed the agreement, you can consider whether you want to sign what is in front of you, try for a better deal or refuse to accept the package at all. There are numerous factors you might not know about or fully understand, so having an experienced employment attorney step in to help you understand the legal ramifications of signing the severance agreement is highly advisable to help you assess any of these options:
Sign
There are certainly reasons you might sign the original severance offer. This may be an unsettling time, but you should consider having an attorney help you weigh your options before you agree to take the package.
Negotiate
If you think your employer should do more, with the assistance of an experienced employment lawyer, you can try to negotiate a better severance package. Among other things, you need to understand to what you are committing yourself and whether you have the leverage to demand more compensation. An experienced employment lawyer can help you evaluate your prospects for success and potentially negotiate a better deal for you.
Walk away
Refusing to accept the severance package is an option – especially if you have too much to lose by accepting its terms that prohibit you from suing the employer. It is important that you understand whether you have a claim worth pursuing before you walk away from a severance package. An employment attorney could be very helpful in this determination by helping you evaluate these considerations:
- Do you feel you were wrongfully terminated or have been subjected to discrimination or retaliation? If so, are you willing to sign the document in exchange for limited compensation and a waiver of your right to sue?
- Is there a non-compete clause that will restrict your ability to find new work or even contact former clients?
- Does the agreement include confidentiality or non-disparagement provisions that violate the law? For instance, in August 2023, Colorado enacted the Protecting Opportunities and Workers’ Rights Act, which has strict requirements around confidentiality and non-disparagement provisions, and penalties if an employer violates this law.
Should you negotiate?
There are numerous questions to ponder in deciding how to negotiate, which can be facilitated with the help of an employment lawyer. Some examples include:
- If you have an offer letter or employment contract, is there anything applying to separation and severance?
- Are you a longtime employee?
- What is your position?
- Are you a high performer?
- Did you relocate for the position? Did the organization provide a relocation package?
- Is the employer complying with its own severance policy?
- Is the severance agreement aligned with any relevant provisions in your offer letter or employment contract, if you have one?
- Is the employer complying with applicable law?
- Have you been involved in any activities that might protect you from being retaliated against or terminated?
- Is there precedent for severance given to similarly situated employees at your company or in the industry?
What else is negotiable in the severance package?
If you decide to counter-offer, think beyond money in your negotiation. Sometimes an employer will not increase financial compensation – especially if that amount is set forth in policy – but can sweeten the severance package with other concessions. An attorney can help you think through these compromises. Just some examples:
- Extension of health benefits (as allowed) or providing a sum equivalent to your out-of-pocket costs to get individual coverage. This could include adjustment of your termination date so your benefits run through the end of the month.
- The amount of a potential bonus (not one that is already owing)
- Outplacement services – coaching, resume help, etc.
- Agreement the employer will not challenge your unemployment claim
- Agreement to limit the parameters of a non-compete clause
- Agreement the employer will not give negative information about you to prospective employers (non-disparagement)
- Letters of reference
- Pay-out for employee awards programs, like points and discounts for participation
Optimize the outcome
Know that whatever course of action you pursue can have important consequences for you. With proper forethought and a representative to help evaluate your next steps, you may make a better decision for yourself and your future.
Our employment attorneys are experienced in reviewing and negotiating severance agreements. Please contact us for assistance.
This blog article was written by Jacqueline Gilvard Landry, a Colorado attorney with experience in corporate law, employment law, internal investigations, and she is a former attorney with the U.S.
Equal Employment Opportunity Commission. It is published here with the permission of Ms. Landry. It is provided for general informational purposes only. It does not constitute legal or other professional advice. Every matter requires a thorough understanding of the facts and law applicable to the individual matter.