By Tom M. Cramer, J.D.
Not everyone realizes how important it can be to have a negotiated severance package if it becomes necessary to separate from an employer. In fact, a severance package should be a part of an employee’s hiring negotiations when first talking to an employer about joining the organization. Most employers are open to such negotiations and expect anyone entering at an executive level to bring up a severance agreement in hiring discussions. Understanding the significance of a severance package can make any “parting of the ways” more amicable and attractive for an employee.
Unfortunately, severance agreements are one feature that employees sometimes neglect to require. If the potential employer doesn’t seem open to discussing severance when joining an organization, it might not be the best company to pursue. If an employer seems surprised when the subject comes up in hiring negotiations, that can be another sign of potential trouble to come. The nature of business today – changes at the top, volatility in markets – means that unforeseen shifts in strategy may occur, which also means that job terminations may happen. It’s important to be ready should a job end. It impacts financial stability as well as issues related to an employee’s professional development as it appears on a resume.
What should a severance agreement include? The obvious answer is how much money someone receives. But determining how much money is a big question on its own. That’s one of the main reasons employees should have a general understanding regarding a company’s generosity in severance before even accepting a job.
There are a number of other issues in an agreement that can mean a great deal to an employee, especially someone who is the primary income source for his or her family. For example, will legal help be needed because of what may be happening at the company? Is there an internal dispute occurring that is moving toward court action? Is there government involvement and will it drag on for a while? These are unpleasant questions, but they should not be ignored because they could be very relevant to an individual’s personal situation when exiting a company. Be sure that legal assistance, if required, is on the list of considerations in any severance agreement.
Another very important consideration for a severance package is regarding medical benefits. The cost of COBRA coverage, which is offered to everyone who receives company-provided benefits, can be astronomical for an employee on his or her own. It is often three to four times what the employee is paying for monthly benefit charges, plus there’s an administrative fee for having access to the benefits. Sometimes employees can bargain for continuation of insurance benefits. Time periods vary for this option, but an employee providing benefits for his or her dependents should certainly try to obtain at least six months of continuing benefits coverage, not at the COBRA rate but at the rate they were previously paying while employed.
Another severance package ingredient should be some type of recruiter assistance in finding another job, especially if a move proves to be the result of a restructuring of the organization. An employee may be performing at an optimal level, but if a segment of the company is being shuttered or sold, that doesn’t mean the employee’s job will continue. Assistance with finding a new job is known as outsourcing. Depending on the reason for an employee leaving a job, there are options he or she should be aware of. An employee’s power in this negotiation may come from something as simple as the company not wanting to face criticism in public because it is cutting its workforce numbers.
If rumors of layoffs are circulating in an office, employees should always be prepared for what may happen next. Even if an employee doesn’t have a severance agreement, sometimes a company will provide blanket benefits for people who are being furloughed. It may not be as generous as benefits received in an individual severance package, but an offering of recruitment help in locating a new job may expedite finding something.
It’s always a good idea to know what a company’s severance policy is. It is often included in an employee handbook, and again while it may not be crafted for someone on an individual basis, at least understanding what the benefits are can bring peace of mind if layoff rumors do begin to develop.
The Scout motto of “Be Prepared” works in industry as well. Sometimes severance situations occur rapidly, and people may not be mentally ready to accept job changes thrust upon them. Having a pre-determined severance agreement can avoid this problem for the most part. It is also advisable to have a lawyer review the proposed severance package to ensure it provides adequate compensation as well as legal protections.
The length of a severance package will vary from industry to industry. It will also depend on the employee’s seniority and level within the organization. Many severance agreements provide for at least a year of annual salary and may or may not include a medical benefits package or an employee car allowance, for example. Again, having a legal professional review what an employer proposes is a good idea based on what is trending in severance agreements at a particular time and in a specific industry.
While the thought of what to do when leaving a job is probably not the most important idea in someone’s mind when accepting a job, it should be one consideration. If it isn’t and things appear to be headed south, even a year into the role, a severance package can be a valuable asset for an employee. Nothing can provide total control, but severance can provide a temporary respite from no income for a family for six months to a year. It’s a question of what having peace of mind is worth.