Assessing and Negotiating a Severance Package

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Let us never fear to negotiate.

John F. Kennedy

Today, you were called into a meeting with HR and your manager told you that your time with the company had ended. HR then gave you a letter which you were advised contained the details on the company’s severance package.

Nothing left to do but sign and leave, right? The company knows what it’s doing – the package is fair, right?

Not always. The company has its own interests – it’s unlikely that these are the same as yours. The reality is that most severance packages we review are deficient in one way or another. Assuming it is fair, without getting proper legal advice, can mean you are potentially leaving tens of thousands of dollars on the table. Think of it this way – it’s not a severance package, it’s a severance offer. And like any offer, you can choose whether to accept it or not. 

Contrary to popular belief:

  • You are not limited to the statutory notice period;
  • Even if you signed a contract with a termination clause, it is possible that it is not legally enforceable;
  • In some cases, severance pay can be more than a month per year of service; and
  • You are not just entitled to base salary for severance; variable pay, bonuses, commissions, car allowance and benefits should all continue during the severance period in most cases.

How Much Severance Pay is Enough?

The first question in assessing a severance offer is whether your employment was subject to any written agreement (such as an employment contract), that includes the limiting of your financial entitlements upon dismissal.

Even if there was a contract, it is not always the end. The law on these termination clauses fluctuates – yesterday’s valid agreement may be today’s liability.  If you signed a contract and your former employer is now relying on it, it’s worth getting it checked by a lawyer before deciding. No Written Employment ContractWithout a contract, dismissal entitlements are governed by the common law. The next step is to determine your entitlement to notice.

Entitlement to Notice

Your entitlement to notice is based on several factors – including your age, your length of service, the character of your employment, and the state of the economy. This is not a scientific calculation but an estimate, that takes into account these factors. Keep in mind that notice is not a windfall – it’s the calculation of how long it should take for you to find another job.

Your entitlement during the notice period includes salary, benefits, commission, bonus, and any other compensation you were receiving. You also have a duty to attempt to mitigate your losses during the notice period – by seeking suitable re-employment. How quickly you can expect to mitigate by finding another job is another factor to consider when assessing an offer. A lower severance offer may be acceptable if you do not expect to be out of work for a prolonged period.

However, if the amount offered is not within a reasonable range of what you could realistically expect in court and you anticipate a long period of unemployment, the next step is to negotiate.   

How to Get More Employment Severance? 

Both parties in a negotiation have the same goal: to quickly and cleanly resolve the matter.

The company wants you to sign a release and go away – almost as much as you want to get paid. It is in all parties’ best interest to resolve a matter without resorting to litigation. An estimate of reasonable notice is based on what you can expect to achieve on your best day in court – but this will arrive after multiple years of litigation, during which you and/or your former employer will be on the hook for any legal fees associated with the litigation.

A negotiation can be won or lost based on preparation. By being aware of your legal entitlements, and having a realistic understanding of when you will find another job, you will be at least up to speed, and maybe ahead of the game.

Counter Offers

With this in mind, you can extend a counter offer. Having identified your legal entitlements at common law, you can rely on this information to argue why the offer is below what you’ll accept, and the basis for the higher amount that you’re entitled to. Referencing what a court may award and indicating that you’ll accept an amount below this reminds the other party that litigation may ensue should the negotiations not be fruitful. Also, documenting the difficulty that you may have in finding employment may further compel the other party to see the strength of your position.  

The company may respond by identifying similar cases where a court awarded a lower amount, and/or by identifying your prospects for employment.

This can turn into brinkmanship – both parties in a negotiation know that if the matter breaks down it may lead to litigation. Litigation does not end negotiations – it is another stage in the process, albeit one with more expense and formal steps. Indeed, once some of these steps have taken place (particularly discovery), parties may have a more realistic understanding of the weak points of their case and may be willing to negotiate further. Very few cases go all the way to trial.

Conclusion

Negotiations are won or lost in preparation. Having a realistic understanding of what you’re entitled to and what you’re willing to settle for is crucial to the negotiation process and a successful outcome. Similarly, as the employer, knowing what your former employee is entitled to should they win in court, as well as a realistic understanding of their chances for re-employment, will assist in crafting your negotiating position. 

Irrespective of what side of the process you’re on, it is vital to move into a negotiation with an eye towards compromise. The adage that a successful negotiation ends with both parties slightly unhappy with the outcome is true, and parties who fail to keep this in mind may find themselves in unwanted litigation where they may end up even more unhappy.    

We assist both employers and employees in all aspects of the employment relationship, and would be happy to assist you whether you are an employee whose employment has been terminated and is now having to assess a severance offer, or an employer who is preparing a severance offer or for a negotiation.

  

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