What You Should Know Before Signing a Severance Agreement

Following a layoff or firing, your employer will likely ask you to sign a severance agreement. But before you sign on the dotted line, you should pause to make sure you know what you’re getting yourself into. Sam Dogen, founder of personal finance site Financial Samurai, and Renee Linares Chin, an attorney and financial literacy advocate, spoke to us about some do’s and don’ts when evaluating a severance agreement.

 1. You may need to hire an attorney

Source: iStock
Source: iStock

Depending on how much money you earned, you may need to seek legal advice. It never hurts to have a trained professional take a look at your agreement to make sure you do not sign something that would put you in a worse position.

“If you make six figures and work for a Fortune 500 company you absolutely need to hire an attorney to evaluate your severance agreement and help you negotiate more favorable terms. If English is a second language and/or you have trouble with the ”legaleeze” of the severance agreement, then you need to hire an attorney. If you decide to go it alone and review your severance agreement: read carefully, use your best judgment, and know that your employer’s human resources and legal team represents their best interests, not yours,” said Chin.

 2. You have rights

You may not feel like you have a lot of rights, but you do. Dogen says one of the biggest mistakes employees make is not taking the time to understand their rights. It is essential to familiarize yourself with all of the materials your employer shares with you.

“Most of the people I’ve spoken to or consulted with have never even read their employee handbook. Employees have many more rights and benefits than they realize,” said Dogen.

3. You need to be proactive

If the writing is clearly on the wall and it looks like your employer may be giving you the boot in the near future, it’s time to prepare. Dogen recommends having a meeting with your human resources manager before you are asked to pack up your desk and swiftly escorted off the premises.

“Employees should be well aware that their company may be planning a mass layoff due to poor revenue or stock price performance. By the time a company announces plans for a layoff, it may be too late. It’s important to be proactive by getting ahead of the layoff announcement by having a discussion with human resources and your manager about a potential severance negotiation,” said Dogen.

4. Know whether you’re really getting severance

Man writing on paper, text, exam, work
Source: iStock

Some workers think they’re getting a severance package when they aren’t. Dogen says you may actually be getting the minimum amount required by law:

“[Don’t] confuse mandatory WARN Act pay with actual severance pay. WARN Act pay is a labor law that mandates employers pay anywhere from one to three months’ worth of salary if an employee is to be let go in a mass layoff (100 or more employees). A severance package is money in addition to WARN Act pay. I’ve spoken with many laid-off employees who said they got a two- or three-month severance. Little did they realize that they really got no severance, just what was due to them by law.”

5. Think twice before refusing to sign

At some point you may be tempted to just forget the whole thing and refuse to sign the severance agreement. Many agreements are pages long and full of legal terms that may not be easy to understand. However, Chin warns that if you do this, you may be giving up some great benefits that could help you stay afloat until you find another job.

“You may miss out on financial incentives offered by your employer such as extended pay, a lump sum payment, and extended health insurance coverage. You may also miss out on employment programs your employer offers to assist you to find a new job,” said Chin.

6. You can negotiate

Dogen says you may be able to negotiate the terms of your agreement. He says one area you should ask about is how payments are made. He recommends requesting a lump sum rather than payments that are spread out over a set period of time.

“As long as severance money is in the corporation’s hands, you are at their mercy. What if you find a job at a competitor during this six months? Will your old employer withhold the rest of your money out of spite? Do not let the severance payment be based on your ability to find new work. Because your old employer agreed to lay you off, you should feel free to find a new job the very next day your severance payment clears. Don’t let your old employer withhold severance payment, or claw back any deferred compensation in the form of stock or cash grants,” warns Dogen.

Chin also says you should not be discouraged if you cannot get more money. When you negotiate, there is a chance that you may be able to get extra perks added to your package.

7. Watch out for land mines

Source: iStock
Source: iStock

There are certain clauses you’ll need to watch out for when reviewing your severance agreement. Breaking any one of these clauses to get you into hot water. Chin says there are certain clauses that you’ll to be aware of:

These are the most problematic clauses which I assist clients to re-negotiate:

Release of Claims: All severance agreements include a release of claims clause. This is where you sign away your ability to pursue legal claims against your employer. If you have a valid legal claim against your employer, then agreeing to release your legal claim will be financially damaging. However, if you don’t have any current legal claims against your employer and don’t foresee any future legal claims, this is a standard clause to sign off on.

Non-compete: A non-compete clause will prevent you from directly competing with your employer for a specific time period. This clause can also prevent you from hiring away other employees from your employer. You can negotiate the terms of this clause to reduce the time period and narrow the geographic region where the clause applies.

Proprietary Information: A proprietary information clause prevents you from using any of your employer’s proprietary information after you leave. If you helped create and develop proprietary information, you may be able to negotiate exceptions to this clause.

Integration: An integration clause means all agreements between you and your employer are contained to the written severance agreement. This can be a problem when employers make verbal promises regarding severance terms which are not included in the written agreement. This clause means your employer doesn’t have to follow through on any verbal promises.

8. The consequences of breaking your agreement can be harsh

Once you sign a severance agreement, you need to make sure that you stick to the terms. Slipping up and breaking one or more of the clauses can have some undesirable consequences. Chin says you want to be careful not to go back on your word. She lists the consequences of breaking some of the most common clauses:

Non-disclosure clause (also known as a confidentiality clause): An employer can sue you for breaching the terms of the confidentiality clause. If your employer wins the lawsuit they can obtain a judgment for monetary damages against you. Also, if the breach of confidentiality leads to any type of theft, there could be criminal charges and penalties.

Non-disparagement clause: A non-disparagement clause would prevent you from publically badmouthing your former employer. With the advent of social media it is easy to find proof of disparagement if you go on a Twitter rant complaining about your employer. The penalty for violation of a non-disparagement clause is that your employer could sue you and demand that you repay any severance money received.

So in a nutshell, it would be in your best interest to get a lawyer, read everything, and, if you choose to sign, be careful that you don’t break any of the clauses. If you do all those things, you should be just fine.
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