How to Negotiate a Severance Agreement

The mere thought of receiving severance sends shivers up many people’s spines.

Severance implies termination. Out of work. No job. And worse—lost wages. But severance also protects both employees and the employer.

In today’s rapidly changing business environment, where companies pursue growth and increase shareholder value through mergers, acquisitions and divestitures, employees continually face the risk of job loss. If an employee is terminated without cause, that worker is eligible for—and should request—severance.

Severance policies protect companies by ensuring that employees make the right business decisions—regardless of whether the decisions result in job loss.

To effectively grow business, companies need to execute strategies that benefit the company, brand, shareholders/stakeholders and key investors, so they institute severance policies to ensure that individuals act in good faith.

When to Ask for Severance

There are three situations when employees can request severance: Upon hire, when you’re asked to sign restrictive clauses, and upon termination.

1. Upon Hire: Ideally, severance agreements should be detailed in the employment agreement (or offer letter) that’s executed upon hire. At a senior level, severance provisions are a normal part of business and are considered a best practice, but severance provisions are less commonly offered in employment letters below that level.

If a potential employer gives you an offer letter that does not include a severance provision, ask for one! You can inquire about how the company handles “termination without cause,” which allows an employer to eliminate a person/position for operational or budgetary reasons—in other words, any reason other than performance.

The employer may respond by including a clause in the new hire letter or explaining the company’s severance/termination policies. Bottom line: It doesn’t hurt to ask.

2. When You’re Asked to Sign a Restrictive Clause: Restrictive clauses prohibit employees from seeking employment with certain firms, in certain industries or from poaching employees or customers.

Employees who sign restrictive covenants agree to limit or restrict future business and employment opportunities for a predetermined timeframe, protecting the current employer from potential financial harm. Severance compensates the individual for limiting potential career opportunities during the restrictive period, providing a reasonable bridge while the terminated employee seeks employment without violating the agreement.

3. Upon Termination: Employment termination can occur either with or without cause. Termination with cause suggests that the employee acted in a manner inconsistent with the company’s performance or behavior expectations. Termination without cause means that the employee did not fail to achieve pre-stated performance objectives, violate company policy or act with willful misconduct, negligence or malfeasance.

If you did not negotiate a severance arrangement during your new hire compensation discussions, you should absolutely request severance upon termination without cause. One thing to keep in mind: If an employee is terminated for cause, the company may offer severance, but the chances of negotiating additional severance weakens substantially.

How Much to Expect

Fortunately, most companies institute formal severance policies, while almost 50% have informal policies. As a rule of thumb, companies calculate severance payouts in one of three ways:

  1. Using current base salary
  2. Using current base salary and target bonus (or most recent actual bonus received)
  3. Providing either option 1 or 2, plus continuing health and welfare benefit coverage for the length of the severance period

Severance payouts vary widely among companies, so since there isn’t a “standard,” there’s room for negotiation. As a starting point, here are some basic guidelines:

If employees do not prenegotiate severance, any subsequent severance payments will probably be calculated using base salary only.

Finally, companies require employees to sign waivers (forgoing any right to sue for termination) in exchange for a severance payment. You shouldn’t sign such a waiver until you’ve thoroughly read the terms and provisions. So ask for time to look over the documents before signing—most companies will grant at least 24 hours to review the information.

Severance may feel like a dirty word, but it actually comprises a healthy, productive component of compensation discussions. Employees and employers should discuss severance terms openly and honestly to establish a long-term, mutually beneficial working relationship.

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