What Is Your Leverage for More Severance Pay?

Being terminated or “laid off,” especially if it’s unexpected, can be devastating. However, your company probably will offer you severance pay.  In this article, we explain ways to increase the amount of severance pay.

At Gardner Employment Law, we have years of experience analyzing and negotiating severance agreements. If you have recently been terminated or laid off from your job and want to know more about negotiating your severance pay, call us today.  

What is Severance Pay and Are There Different Forms of Payment?

Simply put, severance pay is a form of compensation paid to employees who are leaving the company due to termination, a reduction in force size, or other reasons. Severance serves as a financial cushion during the transition period and may include more than just money to support departing employees.

Severance pay typically includes a lump sum payment or continuation of salary for a certain period of time.  Years ago, the amount of severance pay was based on factors such as:

1. 1. length of tenure, 
   2. position within the company, and 
   3. company policy. 

Those factors have been less relevant in a practical application.  Employers tend to pay the lowest amount that will persuade the employee to sign a formal release of all rights contained within the severance agreement.  We’ll discuss the release more below.  In reality, an employer reduces its overhead by cutting jobs, i.e., the company saves money in lay-offs.  But that same employer does not want to face a lawsuit over a termination.  Lawsuits are time-consuming and costly to a company.  Severance pay enters the picture because it is what motivates employees to sign the release of all claims, a promise never to sue the company.

Severance benefits can include more than money.  The severance package may include continued health insurance coverage, compensation for unused vacation days, and support in finding a new job through outplacement services. These benefits go beyond compensation. A well-structured severance package can foster goodwill and maintain positive relationships between employees and their former employers, making transitions smoother.  The typical components of a good severance package usually includes:

1. 1. A lump sum payment of money based on a percentage of your salary for each year worked.  This formula takes into account the dedication of employees who have worked many years for the company.
   2. Extended Stock Option Exercise.  The company may allow extra time within which to purchase shares of stock in the company.  As with the first component, this recognizes the years which the employee continued to work for the company until his or her stock options vested.
   3. Payment of health insurance premiums for a designated period.  This component is more unusual, but in some instances the company will pay the employee’s COBRA premiums for a stated amount of time so that the employee can retain the same insurance coverage.
   4. Executive-Level Transition Services.  Particularly at the executive level, an employee wants to appear “successful” while searching for another job.  Having an office address, even if with an outplacement service, is helpful.  This benefit also includes career counseling, resume and portfolio building, job search assistance, interview preparation, and negotiation tactics.

Additionally, you may already be entitled to other forms of compensation, such as bonuses earned according to the compensation plan or vested stock options.  The written documents for those benefits will continue to govern your rights to be paid, not the severance agreement.  

How to Ask For More Severance Pay?

Asking for more severance pay will require negotiation with your employer.  You must figure out why the company would want to pay out more money.  When negotiating severance terms, you must analyze any leverage you may possess.  Leverage is defined as that special persuasive power to move the other side closer to your desired outcome. 

Leverage can be positive or negative. Positive leverage is your ability to supply what your opponent wants in a negotiated bargain. In a termination situation, the employer wants primarily one thing from you:  your signature on the release.  Yes, the release is a value to the employer because the employer wants to avoid a lawsuit.  Even your suggestion that you may have a valid claim against the company and that it will take more money for you to give up that claim (by signing the release) can move the company to pay more in severance.

Negative leverage is the ability to put your opponent in a worse position. It is threat based. You have the power and legal authority to take an action that could cause damage to the company, and the company will pay money to prevent that action.  Based on the theory of loss aversion, experts postulate that persons usually view possible losses as being stronger than possible gains.  This is based on the psychological phenomenon that people many times exaggerate future unknown damages or losses because of the uncertainty involved.  They fear the worst.

In an amiable employment arrangement, positive leverage generally enhances the relationship. Negative leverage can create hostility and should be used sparingly.

Here are some key points to consider:

1. 1. Individual Circumstances: As the saying goes, “One size does not fit all.” Assessing your individual circumstances and any factors that may strengthen your negotiating position is important: This could include:
      • Length of Tenure: Longer service with the company may provide leverage for negotiating a more favorable severance package.
      • Performance Record: A strong performance history could increase bargaining power. 
      • Legal Considerations: If you have potential legal claims, such as wrongful termination or discrimination, this could increase your leverage.
   2. Market Conditions: Highly skilled professionals deserve pay equitable to their service value. If your expertise is in high demand in the current job market, you may have greater leverage. 
   3. Knowledge of Company Policies: Familiarize yourself with your company’s severance policies and any precedents set. It is important to enter negotiations informed. 
   4. Relationships and Networks: As we discussed in “Avoid Burning Bridges at Work After Termination”, positive relationships with key-decision makers may enhance your bargaining position. Look for your “benefactors” within the company, and call in your markers.
   5. Alternative Options: Assess your alternatives outside of your severance package. If you have other job offers or opportunities lined up, you may be in a stronger position to ask for more severance.

Beyond these factors, having a knowledgeable and capable employment attorney will assist you to navigate severance negotiations. An attorney can provide valuable guidance and properly advocate for your interests, to ensure that the final agreement is fair and legally sound. 

Why Does Leverage In Severance Negotiations Matter?

Leverage is paramount in severance negotiations because, simply put, employers want to save money. In the business world,  sometimes fairness must take a back seat to practicality and cost-saving measures. When you, as the employee, find yourself terminated from your job, your employer’s primary concern is not providing the most “equitable and fair” amount of severance pay but rather protecting their own interests. This reality is particularly evident when considering the legal truism that employment is “at will,” meaning employers can legal terminate employees for any reason that is not unlawful without paying any severance at all.

Unless you have some type of leverage, such a valid legal claim or bargaining power, securing a fair severance package can be an uphill battle. Gone are days when tenure alone guaranteed a certain level of severance pay.  Now, companies typically offer the minimum amount necessary to incentivize employees to sign away their rights.  This saves money and avoids costly litigation. 

In the business sense, time is money.  The prospect of spending months or years in legal battles motivates employers to offer severance as a preemptive measure. Employees may feel compelled to accept whatever offer is presented, fearing they will receive nothing otherwise. Thus, understanding and wielding leverage effectively can be the key to securing a severance package that reflects your worth and provides essential support during the transition period. 

Contact An Expert 

Let’s face it – losing your job is hard. Severance agreements can provide significant stability as you look for work and transition into new employment. If you need assistance understanding and negotiating the terms of your severance agreement, we’re here to help.