How to Negotiate a Severance Package

Severance pay is compensation paid by an employer to a terminated employee that is the result of either: (1) A pre-arranged contractual agreement between the employer and employee; (2) A company policy dictating the terms thereof; or (3) An attempt by an employer to obtain specific assurances and promises from the employee in exchange for a monetary benefit. In this article, we will concern ourselves only with #3.

The first question that I am often asked is this: Are employers REQUIRED to pay severance to its employees upon termination. The simple answer is NO. There is no law requiring an employer to offer severance pay to a terminated employee. However, an employer may have a company policy that dictates specific severance provisions for terminated employees.

Therefore, the FIRST place any employee should look when they receive a notice of termination is his or her employee handbook to ascertain whether they are entitled to receive severance pay from his or her employer. If your company does not have an employee handbook, then call your Human Resources department and ask if the company has a severance pay policy.

Now that you know what severance pay is and where to look for more information about your employer's severance policy, let's talk about the art of negotiation. Let's say for example that your company has a policy of offering two weeks for every year of employment and you have been terminated after five years of employment. The employer offers you ten weeks in accordance with company policy, but after IRS withholding, you'll be left with net compensation that is closer to five weeks of pay and you don't think that will be enough to help you get by until you're able to find another job. So what do you do?

Negotiations can be very complex beasts, but for the purposes of this article, let's break down a negotiation into three components: Information, credibility, and leverage.

Let's start with INFORMATION. In my seventeen years of experience as a severance lawyer, the first thing I look at is the circumstances surrounding the termination: Was the employee laid off as part of a company wide reduction in force (RIF)? Was the employee the only person terminated? Was the employee a 'good employee' (i.e. reliable, dedicated, well-reviewed)? And most importantly, does the employee have any reason to believe that he or she was terminated on the basis of his or her race, sex, ethnicity, religion, sexual preference or disability?

Information is the most overlooked part of the severance negotiation. A negotiation is not a lawsuit, so there is no legal right to demand that your employer turn over all of the relevant information that may help you make an educated decision about your proposed severance package. As a result, the onus is on the employee to gather as much information as possible to prepare (or help your attorney prepare) for the negotiation. A well-informed employee is a well-armed employee.

The next component of the negotiation is CREDIBILITY. Credibility affects negotiations in many ways. For example, let's say that an employer tells you that the offer (in this case) is ten weeks and that they will not negotiate. This employer tactic is the 'Take it or Leave it' tactic and make no mistake -- it is a tactic, a strategy. The idea is to take a hard-line stance in an attempt to impose the employer's will upon the employee in the hopes that the employee will concede defeat and accept the proposed severance package. But what if your friend who got laid off last year hired a lawyer and received twenty weeks (for the same amount of service)? What does that say about the company's credibility? What if the company tells a woman returning from maternity leave that her job was eliminated as a result of a reduction in force but she learns that her male counterparts were immediately re-hired in comparable positions? These are the reasons why it is so important to assess credibility.

But wait! It's not just your employer's credibility that plays an important role in the negotiation -- it's YOURS as well. Let's say you falsely tell your company that you are "reviewing the severance package with my severance attorney" in the hopes of extracting additional compensation. If the company doesn't receive a letter from your attorney, they may rightfully conclude that you are bluffing and refuse to up the offer. Or perhaps you've actually retained a severance lawyer and in an attempt to obtain additional compensation, your lawyer threatens to file suit against the employer but never actually does so. In making an idle threat, your attorney has lost credibility that will affect his ability to maximize your compensation. Credibility is crucial in negotiating a severance package. If you suspect that your employer is not being truthful with you about the reason for your termination or the bottom line on a severance package, it's time to call a severance attorney.

The final, and most important, component of a negotiation is LEVERAGE. Leverage is the power that one party wields over another in a particular negotiation. In a severance negotiation, leverage is based upon needs, wants, and desires. An employer wants you to sign a severance agreement in which you agree not to sue or file any claims for discrimination for eternity. The employer desires to close your employee file and effectively close the book on you. You, on the other hand, need to be able to pay your bills until you find another job. Who do you think has greater leverage in a typical severance negotiation? If you said, 'The Employer' you'd be right most of the time.

The reason why leverage is so important in a severance pay negotiation is because it affords the employee the opportunity to tilt the leverage scale in his or her favor to garner better terms. For example, let's take the previous example of the woman who is terminated upon her return from company-granted FMLA maternity leave (sadly, an all-too-common situation even in today's society). Whereas the employer may typically have the upper hand in a severance negotiation, the fact that the employee is a female (protected class) who had exercised her legal right (protected activity) and was terminated shortly upon her return to work may create a presumption that she was unlawfully terminated. In this instance, this employee may have tremendous leverage (depending on the circumstances) to apply and essentially force the employer to pay out a severance package that adequately compensates her for the loss of her job, in exchange for her promise not to file suit against the employer.

As you can see, with so many factors involved and so many legal issues facing employers, a severance negotiation is not something to be taken lightly. Because severance pay is not a legal requirement, an expertly negotiated severance package could mean the difference between one day's pay and a hundred weeks pay! For most people, other than negotiating the sale of a home, this is the largest negotiation a person will ever encounter in his or her life.

Attorneys can be expensive. Lawyers who focus their practice in a particular area (ethics laws generally prohibit a lawyer from using the work 'specialization') may charge double the rate of a general practitioner (one who takes all types of cases). Hourly rates in New York vary from $200/hour to upwards of $800/hour.

Expert review of a severance agreement and a legal analysis of the circumstances surrounding a termination can be time consuming. Be sure to consider that for every communication (phone call, email, letter) your lawyer drafts and sends to your employer (or their legal counsel), a forthcoming employer reply needs to be analyzed and reviewed with the client. Because of the combination of labor-intensive work plus a higher than average hourly rate, many clients seek out severance lawyers who work on a contingency basis. For some clients -- those with less than five years of employment -- this may be a good option, but for longer-tenured employees, giving up one-third to one-half of your severance to a lawyer in lieu of his hourly rate will usually wind up costing you a lot more money at the end of the day.

If you have been recently let go or believe you are about to have your employment terminated and believe that your employer will be less than generous when it comes to a severance package, it's urgent that you seek out a severance attorney for a consultation.

Author Jason Stern has been practicing law in New York for more than 17 years. In that type he has garnered a reputation as one of New York's top severance lawyers. He is a member of the New York State Trial Lawyers Association and is admitted to practice in New York's Federal Courts for the Eastern and Southern Districts.

His media appearances include Good Morning America, the New York Times, CNN, ABC, Wall Street Journal, Fox News, Headline News, BBC UK, US News and World Report, Bottom Line Personal and many more.

Jason Stern can be contacted directly through his website SeveranceAttorney.