June 24, 2022

Severance Agreement Negotiation Fundamentals

Severance agreements are contracts between departing workers and their employers. This article will review basic terminology, strategy, and tactics applicable to employees and employers considering a severance agreement. The following are not trade secrets; rather, these are fundamental concepts that all effective employment attorneys—whether representing plaintiffs or defendants—do, or should, understand.

Terminology: “Severance agreement” is a contract between a worker and an employer. This contract is often called a severance agreement, severance package, or separation agreement. Regardless of which term is used, this contract is a form of settlement agreement. Almost every severance agreement in California includes the following two basic deal terms: (a) the employer pays money and (b) the worker gives up the right to file a lawsuit against the employer.  Many other deal terms may be included, but the core function of this contract is that the employer pays something to avoid a lawsuit.

Practical Context: In private practice (i.e., ignoring governmental positions), most departing workers do not receive any severance offer. The vast majority of separations ILG Legal Office, PC has observed, including workers who were forcibly terminated and workers who voluntarily departed, involve zero offers of any severance payment with a few caveats. First, some companies—particularly, sophisticated technology companies—have an internal custom whereby many, most or all employees are offered a severance package; not many companies fit this description, but if you work at a company known to have offered several people severance packages, you have a greater chance of receiving a severance offer. Second, certain high-level employees have employment contract terms guaranteeing the right to a severance package if certain conditions are met. Thus, if you are an employer considering terminating a worker without a severance package or a worker being terminated without receiving any severance offer, you are within what we would characterize as the most common form of employment separation.

Strategy: Our law firm ILG Legal Office, PC handles severance agreement negotiations for both employees and employers (aka workers and companies). As explained above, most separations do not involve any severance agreement; this article does not discuss the decision of offering a severance agreement or not offering one; the following discussion is specific to situations where the employer has decided to offer something.

The basic strategic consideration governing severance negotiations is as follows: the greater the risk to the employer of an employment-related lawsuit, the larger the severance amount that would be justified. Factors that tend to increase the amount of the severance payment include but are not limited to: (1) Strong employment claims, (2) Large potential damages from employment claims, (3) Employer’s desire to avoid litigation, and (4) Worker’s inclination to file a formal claim.

For instance, if a particular worker has (1) strong legal claims, (2) with large damages, (3) against an employer that fears lawsuits, and (4) if the worker is comfortable litigating a lawsuit, each of those factors would tend to increase the amount of the settlement. To state the obvious, this is not always the case; rather, the point is that in general the four factors mentioned above tend to increase a severance payment while the lack of any of the four characteristics referenced above would tend to decrease the expected value of a severance payment.

Tactics: A worker or employer considering a severance offer have the following basic options: (a) accept the existing offer, (b) reject the existing offer and negotiate without a lawyer, (c) reject the existing offer and negotiate with a lawyer, or (d) reject the existing offer and cease negotiations. This decision is complicated, and we cannot recommend any of these options as a general default; instead, each decision is unique. We suggest you contact an experienced law firm like ours; our initial consultations are free, so please call us at (415)580-2574 if you are considering a severance agreement, severance package, separation agreement or any other contract wherein the worker is releasing any rights to file a lawsuit in conjunction with departure from a job.