Executive Compensation and Severance Counseling
In certain cases, some whistleblowers can remain anonymous forever; however, the law requires that most must eventually abandon their cloak of anonymity in order to see their case to its rightful conclusion. Executives who decide to become whistleblowers can face apprehension and uncertainty about their future after their identity are made known to their companies. Although there are anti-retaliation laws to protect whistleblowers, the reality is that many no longer feel comfortable working in an environment where they may be perceived as disloyal to the company.
If you decide to leave your company, you must be able to negotiate a favorable severance package, especially if you do not have a sound employment agreement. Severance agreements are binding contracts for settling all past and future disputes between you and your company. There are a number of important legal and economic issues that must be considered when evaluating a severance offer or negotiating a severance agreement. We have assisted many clients with evaluating anti-retaliation claims and, in appropriate cases, have negotiated favorable severance packages. By carefully assessing the strengths and weaknesses of your specific situation, we will identify issues that can be used as leverage to achieve the best possible outcome.
An executive that has been terminated without “cause,” as defined in their employment agreement, is in the best position to negotiate a favorable severance package. It is important to remember that the company’s offer of severance is just that – an offer subject to negotiation. There are a number of important considerations when evaluating a severance package proposal. Many companies offer installment payments over time that essentially keep you on the company’s payroll. If an issue arises within the company for any reason, your payments could be interrupted. A lump sum payment is often preferable to avoid any potential delays or disruptions in receiving payment.
If severance is paid in installments over time, the characterization of those payments raises additional issues. For example, if the payments are a continuation of salary over a period of time, it is important to ensure that the payments will continue even upon death or disability. Severance agreements can include other enforceable provisions that might limit or reduce the amount of salary and benefits, including:
- Mitigation – payments will stop if you begin employment with a new company during the period specified in the severance agreement.
- Clawback – a violation of any provision of the severance agreement can entitle the company to repayment of all severance as well as reimbursement of health insurance costs. Some companies designate themselves as the sole arbiter of what constitutes a violation of the severance agreement.
- Non-Competition – companies sometimes prohibit you from working for a competitor for a specified period, typically one year. This restriction can prove difficult, particularly if you have a specialized skill in a particular industry. Some companies will also require that you permit them to contact any potential future employers to ensure those potential employers are aware of the restrictions on your employment.
- Non-Solicitation – severance agreements can include a provision that prevents you from soliciting employees or customers away from your former company. This provision is usually enforced through “cease and desist” letter sent from your former company to your new employer which threatens legal action for allowing a violation of your severance agreement.
- Unpaid Monies – companies often try to exclude certain items from severance such as unpaid bonuses and expense reimbursements. Any outstanding payments owed by your former company should be identified in the severance agreement. If a bonus has already been earned or business expenses have not been reimbursed, they should not be included as part of severance. The severance agreement should also recognize any accrued paid time off (PTO) or vacation pay.
- Medical Benefits – a severance agreement can provide for the payment of COBRA premiums by the company for a specified period. Since employer-paid medical coverage may be taxable, it might be more desirable to negotiate a taxable lump sum payment equal to the cost of the medical coverage. The continuation of other benefits, such as disability or death, can also be negotiated as part of a severance package.
- Consulting Services – in certain cases, a company might want to avail itself of your expertise and institutional knowledge. A consulting agreement can be negotiated that can be mutually beneficial to both parties. Although such an agreement can involve additional and often unrelated issues, it can still be used as leverage in negotiating a severance package.
Severance agreements are often complicated by the inclusion of problematic provisions and difficult conditions. A severance offer must be carefully evaluated in terms of its monetary value and the potential impact on your life, which could be significant and last for years. It is important to remember that no deal is sometimes better than a bad deal. If the company is unwilling to compromise and bargain in good faith, it is often better to walk away. By declining to accept a severance offer laden with prohibitions and restrictions, the availability of employment opportunities will be considerably expanded. Once firmly established in a new position, any outstanding issues relating to your former employment, such as unpaid compensation, can be revisited from a more advantageous negotiating posture and the availability of a full range of legal options.