“Can a severance agreement require that my husband give up vested stock and stock options?”

Question: My husband was just laid off due to a “cash crunch” at his employer. 

His offered severance package includes language waiving all stock and stock option claims. He had a large amount, some of it already vested. Also, the company was recently recapitalized before his termination, and he was also due stock in the new company. 

Can they legally require him to give up his vested rights?

Escondido, California

Answer: Dear Tamara: You are on the horns of a dilemma, and I’ve been there, myself. Your question is one I remember asking myself several times when I was a younger, less experienced attorney. As is more fully explained below, your husband’s employer cannot “force” him to give up, or take, anything – even vested stock or stock options (often referred to as “equity”) – so the law is somewhat irrelevant in this respect. Also, the agreement presented to your husband may, or may not, express what you think it does. Let me explain:      

1. Severance is a purely “voluntary” transaction on both “sides,” and so either “side” can propose any terms, no matter how rational or irrational, fair or unfair, sensible or nonsensical. Although it is often overlooked, no employer has to offer severance, and no employee has to accept the severance that is offered. So, for this reason, any terms and any conditions can be proposed by an employer, no matter how irrational, nonsensical or foolish they might be; and, too, an employee can put forth an equally irrational, nonsensical or foolish counter-proposal, as well.  

Suppose, for example, I knocked on your front door, and said to you, “I’d like to buy your house. I offer you $100. And, by the way, I want you to give me your car too, for the $100 price.” You would probably say to me, “No thank you,” and to yourself, “Who in the world would accept that deal?” Well, it is sometimes the same way with severance: the initial proposal is just not worth accepting. While you are surely “vested” in the ownership of your house and your car, you just might – who knows? – agree to give them both up for $100. In fact, many downsized or laid off employees quickly accept “bad” initial severance offers. 

The law does not require that transactions – including severance transactions – be fair. While the law does not tolerate any transactions that are fraudulent, or that deny “statutory” rights to such things as overtime, minimum wage or forced labor,  the law does not protect people from their own foolish decisions. 

Navigating the severance experience can be confusing. We offer a 94-Point Master Severance Negotiation Checklist to make sure you don’t miss any severance-related issues or fail to spot problems in severance agreements. To obtain a copy, just [click here.] Delivered by Email – Instantly!  

2. In fact, I have seen numerous instances – like yours – where the terms that are in the severance agreement presented to a departing employee seem to “take away more than they offer.” Over the years, I have reviewed thousands of severance agreements for clients, and in many instances I have said to my clients, “It seems to me that this proposal requires that you give up more than you are being offered.” Or, sometimes I say, “Well, after taxes, the amount of money you are being offered is about $5,000, while the claims you will have to give up in order to get that $5,000 are worth at least $100,000. I don’t recommend you accept the offer.” At still other times, I have said, “The offered severance is $5,000, but to get paid that amount you must agree not to work in your industry for a full year; it sure does not seem worth taking the deal.”  

Sadly, due primarily to anxiety, most people don’t read their severance agreements too carefully, or have attorneys read their agreements for them, and proceed to simply sign any agreement that sounds like it will likely give them some money. 

3. At other times, the apparently unfair or irrational terms offered by the employer are the result of (a) misreading of the language in the agreement by the employee, or (b) sloppy drafting by the employer’s attorney or HR representative. In some cases when I have said to my client, “That does not seem to make sense,” we eventually determine that the client’s initial reading of the agreement is not correct, often because of poorly drafted words. At other times, when I have contacted the employer’s attorneys or HR representatives, and asked them, “Is that what you really mean?” they have responded, “Of course not; how could you think that?” 

It is for this reason that it is often wise to “suspend judgment” for at least a while until both (a) we can try to figure out the true meaning of the words, and, if necessary, (b) we can contact the “other side” to ask them whether they did, in fact, really mean what the words seem to say. Any delay, though, must not jeopardize missing any deadlines set forth in the agreement.

4. Often severance agreements (a) don’t mention stock or stock options, because the employers claim the subject is not relevant to severance, yet, at the same time, (b) severance agreements require waiver of claims regarding stock and stock options as part of the “general release” in the severance agreement. I have a feeling that this may well be what you and your husband may have astutely noticed. If so, you are wise to realize that this does, in fact, represent a substantial degree of risk of financial loss to you. If this is, indeed, the case, then you also need to review the Stock Plan and the Stock Option Plan for what they say is supposed to happen if an employee with “vested” stock and/or stock options is downsized or laid off.  

If the stock and stock option plans say words to the effect “You keep all vested equity,” you have every right to insist that, in the severance agreement it clearly says words to this effect: either (a) “You retain all of your vested equity,” or (b) “What the stock and stock option plans say will govern, and will survive the severance agreement and its release of claims.” 

I can’t counsel you from afar, but if the equity plans say you keep your vested stock and stock options, and the severance agreement does not clearly say you lose them, you are on pretty solid ground, and probably are “OK.” But, bear in mind, this is not legal advice.   

5. May I suggest your first step: Calculate (a) what it is your husband seems to have been offered, and compare that with (b) what you calculate it seems he might lose in terms of stock and stock options. Bottom line, if he is being offered $100,000 in severance, and he may lose $500.00 in equity, it’s not such a bad offer. On the other hand, if he is being offered only $500.00 in severance, but he could lose $100,000 in equity, it is definitely a deal to look at with great worry. This is the first piece of data you need to consider. 

6. Second step: Have an experienced employment attorney review the agreement for you and give you his or her view of what it says; with that new “data” in mind, you can make a better decision as to how to proceed. No matter what, it would seem to be a wise idea to have an attorney experienced in these matters review the agreement for you. Even with all of my experience reviewing thousands of severance agreements, I still sometimes ask one of the attorneys who work for me, “Please read this; I can’t figure out what it means. What do you think it means?” This is the second piece of “data” for you to acquire, and consider. 

If you would like to obtain a list of five or more experienced, “employee-side” employment attorneys in San Diego, near Escondido, just [click here.] Delivered by Email – Instantly! 

7. Third step: contact the employer’s representative and ask for either (a) their intentions on this point, or (b) their agreement to modify the words of the severance agreement so that it is crystal clear that your husband will not lose any stock or stock options if he accepts the severance. Third step: if necessary either retain the attorney to help you, or by yourself, contact the employer’s representative (attorney or HR). From your attorney consultation, you will know whether you will need to ask, “Are you sure you meant to express that all of our stock and stock options – even vested – are going to be forfeited if I accept the severance?” 

If they say, “Yes,” you have every right to try to negotiate that point in this way: “If I have to do that, I would rather not sign the agreement, but instead bring a law suit for what I deserve; instead of that, will you consider removing the offensive wording?”   

If they say, “No, we did not mean that,” then you have every right to respond, “Then will you express what you do mean more clearly in the severance agreement, so I don’t have to worry?” 

Tamara, I hope this has been helpful. Your concern is quite real, and the point you raise is a good one. Getting to the answer to your dilemma may require some work on your part: (a) gathering more “data,” (b) speaking with an attorney, and (c) doing some “negotiating” with your employer’s lawyer or HR representative. The great news is that you sure seem up to the task. I salute you for your careful reading, and your good question. Now, simply, “Go get ‘em.”

My Best,
Al Sklover

P.S.: Is your husband looking for a New Job? We offer a 152-Point Master Checklist of Employment Negotiation Items to help him. To obtain a copy, just [click here.] Delivered by Email – Instantly!  

Repairing the World –
One Empowered and Productive Employee at a Time™

© 2013 Alan L. Sklover, All Rights Reserved.

Print Article