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Negotiating a Better Severance for Executives

Yogi Patel - Monday, November 02, 2015

If you are an executive looking to leave your current business, or if you have recently been terminated, consulting with an attorney is absolutely essential for negotiating the terms of your severance. All to often, executives are either uninformed about their rights, or they simply do not take the time to exercise the leverage they do have, and they ultimately agree to conditions that leave them in a far less favorable situation than necessary. When executives seek the advice of counsel and refuse to blindly sign away their rights, they can be assured that they are negotiating from as strong a position as possible and are maximizing their benefits under any settlement they reach with their former or soon-to-be former employer.

This article is the first in a two-part series on executive negotiation of severance packages and new employment agreements. The goal of this article is to demonstrate how, with the assistance of an attorney, an executive can maximize her leverage in negotiating the termination of her employment. The second article in this series will detail how an executive can utilize the expertise of a lawyer in negotiating the terms of a new offer of employment.

Why do Employers Negotiate with Executives?

Perhaps most fundamentally, an employer negotiates because either it or the executive is seeking to terminate a relationship governed by a contract that did not work out. Unlike a typical at-will employment arrangement, an executive employment agreement may contain a wide array of benefits, obligations, restrictions, and even limits on termination itself. The terms of an executive employment agreement can govern the actions of the employer and executive both during the performance of the contract and after they part ways, and a breach by either party can have serious consequences.

Additionally, an executive may be financially invested in the company, holding a significant number of shares or other assets in the company’s name, or she may know inside information about the business’s operations. Buying or otherwise taking back company assets from an executive and ensuring she does not reveal company secrets after she leaves are two vital interests of employers that give significant leverage to executives when negotiating a severance.

Finally, an executive may have been subjected to unlawful or abusive treatment, or she may know of other behavior or information that the company would not wish to be made public. While an executive must be careful not to short-change herself in waiving claims against an employer or to partake or implicate herself in anything illegal or unethical, her experience and interactions with others within the company can also strengthen her bargaining power.

How Does Negotiation Work?

Regardless of whether an executive has been terminated, is facing termination, or wishes to leave her current position, the first step is always to consult with an experienced attorney. An executive is ill advised to engage in negotiations unless she is clear about what her obligations and rights are under both her employment agreement and the law. Reviewing the contract with a lawyer ensures that an executive understands the full implications of its terms and enables her to develop a negotiation strategy with the assistance of an expert.

The next decision to make is whether to have the attorney directly advocate on the executive’s behalf, or for her to assist from the sidelines. Typically, this decision will depend upon the relationship between the executive and her employer, whether the situation is hostile or not, and to what degree the executive will be using potential legal claims as leverage.

The advantage of having the executive negotiate directly with her employer while the attorney advises in the background is that in an informal format, an employer may be willing to discuss terms more candidly. If an informed executive is able to work out a severance with her employer in such a manner, negotiations may proceed more quickly and additional confrontation may be avoided. Still, even in the most amicable of negotiations, an executive should not agree to or sign anything without having her attorney carefully reviewing any proposed terms of separation.

The reality is, however, more often than not an executive is seeking to leave her position or is terminated because of a dispute between her and her employer. The initial conditions for negotiating are therefore often unfriendly or hostile and attempts at informal resolution can prove to be counterproductive. Involving an attorney under such adversarial circumstances is not only necessary to ensure that an executives interests and rights are all being protected, but it also can mitigate some of the personal hostility the parties may feel towards one another and provide some leverage in reaching a resolution.

Once an attorney is involved, she will usually communicate with the employer’s attorney and make a severance demand based on the 1) terms of the executive employment agreement;
2) actions of the parties; 3) existence and viability of any legal claims against either party;
4) need for the employer to protect its interests and public image; and 5) the financial interests the executive has in the company. An experienced attorney will be able to take all these factors into consideration and weave them into leverage designed to maximize an executive’s compensation package with an eye towards avoiding litigation. While sometimes filing a claim may prove necessary, it is almost always the objective to reach a settlement without involving the courts.

So What Exactly are the Benefits of Negotiation?

Executives who have opted to negotiate rather than waive their rights and settle for less have received any number of the following:

  • • Additional Severance Pay
  • • Severance Pay as a Salary Continuation Rather than as a Lump Sum
  • • Continued Medical Coverage for their Families
  • • Additional Consideration for Agreeing to Restrictive Covenants;
  • • More Favorable Asset Buyout Terms
  • • Compensation for Waiving Legal Claims
  • • Compensation for Entering into a Confidentiality and Non-Disparagement Agreement
  • • Reimbursement of Unused Vacation Days
  • • Postponing the Executive’s Termination Date
  • • A Neutral or Positive Letter of Reference
  • • Reimbursement of Attorney’s Fees
  •  

Conclusion

Most employers want to be held in high esteem by their former executives, or at least have that be the public perception. Though employers might be stringent in negotiating better severance packages because they do not believe the former executive has power, an executive who pushes a negotiation can prove not only that she does have power, but also that it may actually be in the employer’s best interest to negotiate. By consulting with an attorney, executives can become fully informed of their rights and the leverage they have, and can design a negotiating plan that maximizes their bargaining power that increases the benefits they receive as severance.

Next month, we will publish the second article in this series, which details how executives can maximize their leverage in negotiating a new employment agreement with the assistance of a lawyer. If you are an executive looking to leave your current company, negotiate a new employment agreement, or if you have been recently terminated, you are encouraged to consult with one of our attorneys and may contact us here.

This article is not intended to be nor should it be construed as providing legal advice. As with any matter, the particular details of each executive’s situation require careful consideration and should be reviewed individually with an attorney.

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