Many employers offer severance packages as a matter of policy. Generally, employers offer severance for two reasons — to protect them from liability from the employees they terminate and to maintain goodwill with former employees. The employer requires the employee release any and all past claims, known or unknown, in exchange for some amount of money and possibly benefits and other items.
In most instances severance is not owed to the employee. Rather, it is a voluntary agreement between the employer and employee. There are some exceptions in which the employee has a pre-existing contract that mandates severance in the instance the employee is terminated. Unlike some countries, the idea of mandatory severance never gained a foothold in the United States. Likewise, there is no formula that mandates a certain amount that must be paid in exchange for the release agreed to by the employee.
The release required by the employer may only release the liability for its past acts. Specifically, the employer cannot mandate the employee release it for future acts that the employer commits. If a release for future acts is contained in the severance agreement, then it is not binding as a matter of law and should be re-drafted to limit the release only to past acts.
There are implications to receiving the severance pay in a lump sum as opposed to pay continuation. Some employers prefer to simply keep the employee on payroll for the severance duration (pay continuation) while the employee is effectively terminated. The benefit to that is the tax implications may be lower, at least in the short term. Likewise, the employer may keep the employee on company benefit plans for the same duration. Pay continuation likely prohibits the employee from collecting unemployment benefits for the duration of the severance payments.
A lump sum severance payment will usually be more beneficial to the employee who plans to attain unemployment benefits. The Unemployment Agency only attributes the lump sum payment to the week in which it is received and will pay benefits for all other weeks of unemployment. Although, the payroll tax deduction from the lump sum severance will usually seem unusually large to the employee. It is important to realize, however, that the tax consequences may be nullified at end-of-year tax reconciliation via a refund.
Sometimes the severance payment can arguably constitute non-taxable remuneration, such as that for emotional distress. If this is the intent of the employer and employee, then they should clearly state as such in the severance agreement. For this reason, those receiving severance benefits should usually seek tax advice in regard to the characterization of the payment.
Non-disparagement and confidentiality clauses are a standard obligation of the employee. That is to say, they cannot reveal the terms of the agreement to anyone other than a privileged source, and are not allowed to speak negatively of the employer; even if the employee’s negative assessment is true or plainly opinion.
The employee considering application for unemployment benefits should ensure the employer will not contest his or her application. This does not necessarily mean the Unemployment Agency will grant the claim, but only that the employer will not contest the employee’s claim. Likewise, it should be ensured that the employer will report to the Agency that it laid off the employee, as opposed to terminating the employee for a disqualifying reason. In this same vein, the employee should ensure the employer will provide at least a neutral reference (i.e., dates of employment and position held), and not provide negative information or opinions to a prospective employer seeking a job reference.
Sometimes severance benefits are negotiable. This is where the skilled attorney can greatly help identify possible claims to enhance the severance pay and benefits payable to the employee. If the termination happened under questionable circumstances or there were arguably illegal actions (e.g., wage violations, discrimination, harassment) prior to termination, then there is an opportunity to seek enhanced severance. If the circumstances resemble this, then it may be worthwhile to consult with an attorney. It may be the case that the employee would be better off not agreeing to severance at all and pursuing the claim more formally.
If you find yourself in the position of being offered a severance agreement and are not sure of the next step to take, please do not hesitate to contact The Schipper Law Group here or call us at (248) 729-2414. We have negotiated hundreds of these agreements and can be your trusted advocate to maximize your severance.
