The Top 9 Severance Package Landmines for Employees, Part 2

The Top 9 Severance Package Landmines for Employees, Part 2

This post is a part two of a discussion about the top 9 landmines employees may discovery in severance agreements.  For the first four landmines, go to  {Part 1}

5. Non-disparagement agreements

It is fairly standard for severance agreements to contain language preventing you from saying anything disparaging about your former employer. I have had clients turn down severance packages because they were absolutely not going to argue (we have had clients who wanted to write a book!) Generally, though, there is not much to be gained from badmouthing a former employer, especially if they are paying you not to do it.

Some of these clauses, however, have teeth in the form of liquidated damages or fee shifting provisions. This means that you are agreeing that in the event that they catch you saying negative things about them, they can sue you for thousands of dollars.

Nobody likes to be terminated, and sometimes anger can get the better of us. If you do not think you can hold it together at the next national sales convention, or, if you have good reason to want to be able to disparage, you should try to negotiate to lighten or remove this language. One sometimes useful modification we have obtained involves language which says that disparagement does not include statements made in the course of “fair business competition.”

6. Continued Indemnification—Protection Against Future Lawsuits

Ohio’s Laws Against Discrimination (and some federal laws, such as the Fair Labor Standards Act) impose individual, personal liability for certain conduct. Fortunately, most employers will “indemnify” or protect former employers with their assets, insurance, and often pay for lawyers. When a departing employee signs a complete waiver and release of legal claims in a severance agreement, the release may waive these indemnification protections. Many employers, however, will agree to language which preserves the rights of indemnification in the future—indeed, it is often in their interest to do so. Experienced employment lawyers can help with this wording and in convincing the former employer to carve this right out of any release of claims.

7. Stock Options and Restricted Stock Awards

Departing employees often leave with unvested options or stock awards which they will lose because they will not be employed when the on the vesting dates.  While accelerated vesting of unvested stock does happen, it is not something the company can just agree to do, absent a specific provision in the stock plan (which is unusual) or action by the compensation committee of the Board of Directors, which typically only happens for the highest level executives. This does not mean, however, that you cannot get some value for these lost benefits. Good negotiating strategy should include, at very least, reminding your former employer what you are losing, and perhaps asking for some value for the lost options. Sometimes, there are legal arguments — that stock value was promised compensation and that it should be paid or at least partially paid.

8. Tax Implications

One danger lurking in large severance or other large payments to departing employees are the tax code and regulations governing these kinds of “golden parachute” payments. Unless done right, the IRS can impose a significant excise tax on top of regular income tax!  We advise clients to get tax advice from tax experts (and can help direct them to these experts when needed) when we spot this potential. Because these tax regulations are quite complicated, very few tax advisors know how to help—and so an expert in what is called “409A” and other governing regulations may be needed. Your employment lawyer should know when this potential exists, and help you find the right advisor to avoid unnecessary taxes.

9. Deferred Savings including Heath Savings Accounts

The general, board releases of legal claims that come with severance packages may (sometimes unintentionally) release rights or benefits in deferred savings accounts or health saving accounts, where you may have saved money.  Your employment lawyer should ask about every kind of plan or account that you had with your employer, and make sure you are not waving any right to money or other benefits.