Severance Offers: When It Pays to Say “No Thank You”

“Poise means never fighting yourself.”

Bob Tyler

ACTUAL CASE HISTORY: Arthur, 39, had been employed for 17 years by a textile importer headquartered in Atlanta. His employer’s primary customers were furniture manufacturers in the southern U.S. who used fabrics produced in Chinese factories. With fewer people buying furniture, fewer furniture makers were buying fewer imported fabrics, and business was just terrible. On a Friday afternoon, Arthur was called into a conference room, and given the bad news: he was being laid off.

At his “layoff meeting,” Arthur’s employer followed the usual “script.” First, his boss told him that “This is not an easy thing to do,” and then left the room. Then the HR representative explained to him that “The Company is willing to make you a generous severance offer, totaling six months of salary and health insurance, which is explained in these papers.” Arthur was given a set of papers, told he should leave the premises, and assured that his personal belongings would be delivered to his home on Monday.

Arthur and his wife, Justine, were surely not happy about Arthur’s job loss, but they had “seen it coming” for at least six months. In fact, seven of Arthur’s colleagues had lost their jobs in the past four months. “At least,” they said to each other, “we have the severance package to rely on in the meantime.” Arthur and Justine called our firm to request a telephone consultation, and sent us Arthur’s severance papers to review. This is what we found the Company had offered Arthur:

Six months of continued salary payments, provided Arthur completed the transition of his duties “completely, professionally and satisfactorily,” in the Company’s sole discretion. [You’ll remember that Arthur was not given time to do that while employed; thus “transition” efforts would be on Arthur’s own time, without compensation.]

Six months of health insurance continuation, except that the Company had the right to discontinue coverage for Arthur at any time, if at that same time it also discontinued coverage to other employees. [In fact, it had been rumored that employee health insurance was soon going to be halted.]

In order for Arthur to receive these payments and insurance, he had to give up any claims he had to the annual bonus he was scheduled to receive the following month, which was the equivalent of about three months of salary. [Having to give up so much – equal to one-half of his severance offer – seemed so unfair to Arthur and Justine.]

In order for Arthur to receive the payments and continued insurance, Arthur also had to give up the unvested stock he had been awarded the two previous years, and any claim to the sales commissions the Company owed him, which together totaled about $50,000. [These additional ‘give-backs’ made the severance offer the equivalent of zero.]

As we see in perhaps 10% of severance agreements, Arthur’s severance was “mitigated,” meaning all severance payments would stop if and when Arthur became re-employed.

Most disturbingly, in order to get any severance Arthur had to promise not to work for any competitor of his employer for one year, even though this was the only kind of work he had ever done.

As we see in perhaps 5% of severance agreements, Arthur’s employer required him to agree that his employer could contact any future employer he might have, to make sure they knew about the restrictions on his future employment regarding competition and solicitation.

If Arthur violated any promise in the agreement, as determined by the Company, in its sole discretion, he had to pay back his severance, and reimburse the Company for his health insurance coverage. [Arthur and Justine were particularly distrustful of this provision.]

After an hour or so of discussion with Arthur and Justine, I could tell they were crestfallen. Justine asked the best question: “Is it worth it, at all, to take this severance package?”

We tried to negotiate away some of these problematic provisions, but were not successful. Though Arthur and Justine needed the money badly, in the end, Arthur didn’t accept his employer’s severance offer, and didn’t “tie himself up” in any way as a result. Instead, with tenacity, he searched for and found a new job.

About six months later, when Arthur was comfortable and felt well-established in his new job, we “revisited the situation.” That is, we contacted Arthur’s former employer and demanded what he was due, including his bonus and stock, and promised a lawsuit if a reasonable settlement was not promptly achieved. A very successful settlement soon emerged, which was in excess of the severance offer, itself. In Arthur’s case, saying “No Thank You” turned out to be the wisest choice to make.

LESSON TO LEARN: Most people expect severance offers to follow this simple formula: the employer gives money to the employee, and in return the employee gives the employer a release of claims. I wish it was that simple, but it never is.

Severance offers are often complicated: they have “strings” attached, often with problematic provisions and difficult conditions. Sometimes, severance offers “take more than they give.” Each severance offer has to be reviewed carefully, and has to be evaluated as a complete “package.” It is sometimes the case that signing a severance agreement, and receiving severance monies, is an overall negative step, and is “just not worth it.” A difficult balancing of several factors is always necessary.

Severance is not given to employees as a present, as a token of appreciation, or as a symbol of love. No, from the employer’s viewpoint, a severance package is intended to give the employer more than it costs the employer; that is why they want you to sign it. And bear this in mind: the employer’s lawyer drafted it. So . . . wouldn’t you expect the employer’s lawyer to give the employer lots of advantages, and leverage, over you?

WHAT YOU CAN DO: Here are seven things that you should (i) look for, (ii) assess, and (iii) bear in mind when deciding whether or not you should accept a severance offer made to you:

1. Requested Revisions Refused?: No severance offer is written in stone; it’s word-processed and, thus, easy to modify. If any provision of your severance offer is objectionable to you, don’t be afraid to object to it. You have every right to ask that severance terms be modified, and you should do so in a respectful, reasonable, rational written letter or memo, preferably sent by email or Federal Express. You just might find that your employer is willing to make the changes you want, but only if you ask. If some of your requested revisions are agreed to, you might consider asking for more. On the other hand, if your revisions are refused, at least you know you tried. Always ask; never presume you have no right to ask, and never presume you have no chance of being successful if you do ask.

2. Severance “Rewards” may be too low: If your severance offer was $1.00, would it be worth giving up your right to work in your industry for a year? Of course not; that is the point. Sometimes what you are getting in return for giving up potential claims, and restricting yourself in other ways, is just not enough. Bear in mind what you are being paid in severance is taxable income. The effect is that you will probably lose 28% to 42% of it to taxes, before you even see it.

3. Risks of Receiving Severance “Rewards” may be too high: In Arthur’s severance offer, there are provisions that make it very possible that Arthur will never see a dime of his severance monies. For example, he must first complete all transition duties “completely, professionally and satisfactorily, in the Company’s sole discretion.” Such provisions can be found in many severance agreements. “Risk of receipt” is a very important consideration in assessing your severance offer.

4. “Give-Aways” may be just too great: Note that Arthur had to agree to give up what he earned in (i) bonus, (ii) unvested stock, and (iii) commissions, in order to collect his severance. Bear in mind that the “release of claims” in a severance agreement says, in effect, “I give up all other rights, claims and entitlements.” If you are required to give up something significant that you have earned, or is due you for other reasons, you might consider not accepting the severance offer, and instead fighting for what is rightfully yours.

5. Be wary of possible “Clawback” of Severance “Rewards”: Arthur’s severance offer also contained a provision that said, under certain circumstances, he may have to pay it all back (commonly called a “clawback”). You should always ask that such provisions be eliminated, or at least made more reasonable. For example, if a provision says that you must pay back all severance if the company believes you violated the severance agreement, always ask that the words “and a court has ruled it is correct” be added to the sentence.

6. Restrictions may be too harsh and limiting: It is common to find “non-competition” and “non-solicitation” provisions in severance agreements. These provisions make you promise (a) not to work for a competitor (a “non-compete”) or (b) not to solicit employees or customers away from your employer (a “non-solicit”), in either case for a certain period of time. Do not make the huge error of believing they are not enforceable, because they are enforceable in almost all states (California being the primary exception). More importantly, you must understand that “non-competes” and “non-solicits” are most often enforced not in court, but rather by your former employer simply sending a letter to your next employer that says, in effect, “If you don’t fire that person, we will sue you for permitting him or her to violate his/her restrictive agreement.” It’s called a “cease and desist” letter, and is very effective in enforcing such provisions.

Let’s say your severance offer is $10.00, and your severance offer also contains a non-compete and/or non-solicit agreement that might keep you out of work for six months, I hope you’d say, “As is, it’s just not worth it.” [Note: There are several articles in our SkloverWorkingWisdom™ Newsletter Library on how to resist, reduce and/or restrict the effect of such a restrictive agreement.]

7. “No Thank You” is not necessarily forever: One last thought: If you should decide that, overall, the severance offered to you is not worth accepting, in light of the “strings” attached to it, saying “No Thank You” can be the very thing that might convince your employer to make some (or all) of the changes you have requested. It’s very possible that, as a result of saying “No Thank You,” you will get more reward, less risk, reduced restrictions, or a blend of all three that might convince you to say, “Yes, I accept.” We’ve seen that happen many times. And even if that does not take place, if you later change your mind, and decide to say, “Yes, I accept” your employer will likely permit you to do so, regardless of any deadline passing, bad feelings, or other intervening events.

In sum, it sometimes makes sense to just say “No Thank You” to an offer of severance. The “headaches” incorporated into a severance offer may be substantial, may last for years, and may make the overall deal just not worth it. These seven factors should all be considered in making your ultimate “yes” or “no” decision.

Deadlines are important; don’t let your severance deadline expire. To help you ask for more time, we offer our Model Request for More Time to Review/Sign Your Severance Agreement. It shows you “What to Say and How to Say It.”™ To obtain a copy, just [click here.] Delivered by Email – Instantly!

P.S.: You might be interested in our Master 94-Point Severance Negotiation Checklist, to give you the peace of mind and freedom from worry that you forgot to raise or entertain certain points of discussion and negotiation. To obtain copy, just [click here.] Delivered by Email – Instantly!

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation of work and career issues requires that you consider all aspects of any agreement – including a severance agreement – you are asked to sign. Many people see only “dollar signs” in such agreements; you must understand the “strings,” as well. While receipt of money may be enticing, the overall “deal” must be reviewed in totality.

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

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