Negotiating Severance Packages: Parachute or Free Fall?

brad_yamauchiBy Brad Yamauchi, Partner

You probably have read about “golden parachute” severance packages that pay millions of dollars to corporate executives, even when they are fired for poor performance or a scandal. Why is that? Can you get a severance package if you voluntarily or involuntarily leave your job?

I have negotiated severance packages for hundreds of clients in my 33-plus years of representing all types of employees, from hourly or low income workers to high income executives. This is a complex area of practice that requires a broad range of knowledge and negotiation skills.

To be effective, I must be familiar with all possible legal claims and damages, evaluate stock options and other types of compensation schemes, understand the economic situations of the company and the client, understand client goals, determine the motives of corporate management, HR and their attorneys, and have enough experience to know industry standards and expectations, among other considerations.

No two negotiations are the same. I need to be creative and assertive in giving the company a reason to offer my client a significant severance package that may include continuing pay and health benefits, a lump sum of cash, stock or stock options, retirement contributions, good references, purging negative records and/or work as an independent contractor. If a severance agreement is worked out, it requires that my client waive any and all legal claims (except workers compensation). Confidentiality and an agreement not to apply for jobs at that employer are also common terms in a severance agreement.

EXAMPLE CLIENT SITUATIONS

Below are two examples that present a composite of actual client situations.

Client A was a pharmaceutical sales manager who was pressured to misrepresent to customers the effectiveness or readiness of a company product that treats a medical condition. Soon after she refused to do so, the company fired her saying she falsified sales records and failed to meet sales expectations.

On the surface, this was a whistle-blower retaliation claim because it appeared that she engaged in legally “protected activities” (complaining to management of what she reasonably believed to be a violation of law) shortly before her termination. However, to win that claim she must prove that the reasons given for her termination were pretexts for retaliation. If we found such evidence, the company would be more willing to pay in severance or a settlement of her claims rather than face a lawsuit that could result in damages and fees far larger than the severance package and many days or weeks of management time or loss of productivity.

In reality, the settlement was motivated by company executives wanting to get rid of mid-level managers who could benefit from the company going public. My client was not aware of the company’s plans to go public until after her termination. When the plans were discovered, the company was willing to pay her a good severance package that considered what she would have gained had she continued to work and received money from the anticipated public offering.

As it ended up, she received her severance package. But rather than going public with a windfall to the remaining managers, the company was acquired and merged, resulting in the elimination of the managers involved. In this case, access to key information on the planned public offering and the timing of the severance deal led to a very good outcome for the client.

In another example, Client B, an executive making about $300,000 per year, was terminated for misconduct that was well documented and supported by several credible witnesses. Despite the legitimacy of the termination, I negotiated a severance package for him worth over $400,000. After reviewing hundreds of documents and interviewing Client B, I found that the company had failed to reimburse my client for expenses related to security measures for him and his family as orally agreed upon by the company’s board of directors many years ago. This served as the basis for a legal claim of breach of contract and pushed the situation to a relatively quick settlement.

NEGOTIATING SEVERANCE PACKAGES

In responding to a legal claim or negotiating a severance package or settlement, company managers and attorneys must also evaluate numerous factors such as the merits and damages of the articulated claims by the employee (which must be determined, evaluated and asserted by an experienced employee rights attorney), the estimated attorney’s fees in defending the lawsuit, the loss of management time and the odds of losing a trial.

Companies and their attorneys have different attitudes in negotiating severance packages. Some want to deter employment claims by establishing a reputation for punishing the employee/claimant by not settling until a lawsuit has been filed, taking abusive depositions or settling as the case is headed to trial. But in my experience, such tactics end up with larger settlements that ultimately do not deter claims.

Most employers take a practical view. While they may dispute a claim, they conduct a business-like cost/benefit analysis and usually negotiate a severance package that eliminates the potential for a large verdict or defense bills, but still meets the requirements of my client.

CONCLUSION

To meet client goals, I must thoroughly investigate and evaluate my client’s situation, assert viable and credible claims and damages, gain the trust and respect of defense counsel and management and not overplay or underplay the case. Just like in poker, you have to know “when to hold ‘em and when to fold ‘em,” and it takes decades of experience and thousands of situations to become a better player and win.

I hope you never need me to negotiate a severance package for you. But if you do not have a well-written and thorough employment agreement with severance terms and conditions, and you are about to leave your job (by choice or not), you may benefit from having me evaluate your situation to see if you should play your cards and present claims to negotiate a severance, or just move on.

In all separations, clients want a financial cushion while looking for another job and a reward for many years of loyalty and service. However, in reality, the amount of severance will be determined by the merits of potential legal claims, more than the good will of management.

As I tell my clients, no matter how a severance negotiation may end, if you leave a job and go on to have a better life without having to work with people you do not like or do not respect, you win.

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