Employees presented with a severance offer often have questions about the laws governing severance pay, whether they can negotiate for additional pay, and whether they should hire an attorney to review the terms prior to accepting the offer. This article sets forth some general considerations for those presented with a severance offer and attempts to provide some context to aid in the decision-making process. This article is not legal advice and should not be considered an adequate substitute for a qualified attorney. If you have any concerns about a severance offer you have been presented with, an attorney licensed in your jurisdiction is generally the best source to address those concerns.
What is Severance Pay?
Severance pay is defined in Black’s Law Dictionary as “money (apart from back wages or salary) paid by an employer to a dismissed employee.” Severance pay is usually paid in exchange for a release of any claims that the employee might have against the employer. So, practically speaking, severance pay is a payment of additional money from an employer to a terminated employee that is made in exchange for the employee giving up a right to any claims she or he may have against the employer.
A severance package may include severance pay, along with other non-monetary incentives (e.g., the continuation of company-sponsored benefits).
A severance offer is usually a written offer presented by an employer to an employee setting forth the terms of the severance pay and/or severance package.
A severance agreement occurs when an employee accepts the severance offer. Barring exceptional circumstances, a severance agreement is a legally binding contract that is enforceable in court. If that severance agreement contains a release of claims then the employee that accepted the severance package will be barred from pursuing a lawsuit absent exceptional circumstances.
What Laws Govern Severance Pay?
Generally speaking, employers are not required by California or federal law to provide any severance pay to employees. For this reason, most employers do not partake in formal severance pay plans and do not guarantee any set severance amount. In the rare cases where employers do offer a formal severance program, the Employee Retirement Income Security Act of 1974 (“ERISA”) may preempt and supersede applicable state law and will generally be controlling. In other rare cases involving severance rights guaranteed by a collective bargaining agreement the Fair Labor Standards Act may apply.
If there is no formal severance program offered or guaranteed by your employer, which is the case for the vast majority of employees, the severance offer presented by the employer is likely governed by state contract law. There are many, many facets to contract law and many, many exceptions to general rules. What is important to keep in mind with regard to severance offers, like most offers, is that after they are accepted a contract is formed and that contract is likely governed by state law.
Why Do Companies Offer Severance Pay?
If companies are not generally required to offer severance pay to employees, then why do they do it?
Well, there are a few plausible explanations. Companies will usually say that severance payments are a way to “soften the blow” of unavoidable layoffs or necessary terminations by providing former employees a “financial bridge” to their next position. This keeps company morale as high as possible when difficult staffing decisions are being made.
Another explanation for severance offers is that it is often cheaper for companies to offer severance pay than defend against lawsuits. For example, if an employee went on maternity leave and upon returning was told she was being terminated, an employer may preemptively offer severance pay to avoid being sued for retaliation. In circumstances like this employers can settle potentially valuable claims for pennies on the dollar.
What is a “Fair” Severance Offer?
One of the most common questions we get is whether a certain severance offer is “fair.” This is usually impossible to answer because there is no standard benchmark to compare severance offers – it varies depending on company, industry, position, and the circumstances unique to every employee.
For example, if you are one of 200 people that were laid off, you have no known legal issues with your former employer, and the company is not financially healthy, a fair offer may be anything the company can afford paying you at that time. Conversely, if you are the only employee being targeted for termination, you have known legal issues with your employer, and the company is thriving, a fair offer may be more than what the company initially offers and you may have room to negotiate.
Are There Time Considerations?
Most severance offers are time sensitive. Usually, the employer presents the severance offer and gives the employee between 7-21 days to sign and return the agreement, thereby accepting the offer and creating a legally binding contract. For this reason, you should review your severance offer and put your acceptance deadline on your calendar immediately. If you wait until after the set deadline to accept the offer your former employer may not be obligated to make payment.
When to Hire an Attorney?
We are frequently asked whether it makes sense to hire an attorney to review a severance offer. Again, the answer is highly dependent on the specific circumstances of your situation.
That being said, we generally do not see any utility in hiring an attorney to review a settlement offer unless:
You have specific concerns about the terms of the offer;
You believe you have legal claims against the company; or
You have other contracts that interplay with the terms of the severance agreement, such as commission agreements, equity agreements, non-competes, etc.
If those circumstances apply to you, it likely makes sense to hire an attorney. If not, it may make sense to save the money, accept the offer, and move on without the assistance of an attorney.
Conclusion
This article provides our general view on severance offers, pay, and agreements. We hope that you found it helpful. But it is critically important that you understand this article is not an adequate substitute for a qualified attorney. There are many, many considerations that go into severance offers and agreements – both legal and practical. So, if you have concerns about the specific terms of an offer and/or believe you have valid legal claims against a company, it may make sense to reach out to a qualified attorney in your area to assess your situation.
Comentarios