Severance Agreements and Offer Letters, or Severance Letters and Offer Agreements: What Senior Managers and Directors Need to Know

Given the state of the economy, companies large and small are looking to reduce head count and cut back their payrolls.  Senior members of management are often the first to go as they represent big salaries and even bigger bonuses that severely impact the bottom line. We here at Maya Murphy, P.C. represent a number of executives for whom we are negotiating severance agreements and/or job offers and see developing trends in both the hiring and termination aspects of employment law.

In this article, we will point out and discuss those trends so that you are better able to assess your own particular situation as you consider leaving one company to join another, and decide whether to engage legal counsel to help you navigate the process.

Severance Packages

On the severance side of the equation, companies are looking to shed employees at the lowest possible cost.  Mutual understandings and customary practices that in better times might have formed the unspoken foundation for formulating a severance package have fallen by the wayside.  Now, everything is a point of negotiation (if not actual contention) starting from a base line of zero, and nothing can be taken for granted.  That having been said, the departing employee (particularly one at or near the senior “C” level, e.g., CEO, COO, CIO) is not totally devoid of leverage.

Departing employees, irrespective of their position in the company, are typically first offered the standard “fill in the blanks” severance package routinely generated by HR.  The package could just as easily apply to someone in the mail room, as the Board Room. It is intended as a starting point for negotiation and should be viewed as such. The role of counsel is to take that “cookie cutter” offer and make it reflect the employee’s individual contributions and history of adding value to the company so as to justify a more generous severance package.  Each proposed term or condition is considered and quantified as if taken from an “a la carte” menu.  

For example, non-competition, non-solicitation, or non-disparagement provisions each come at a cost to the employer.  The severance package is negotiated as a unified whole; no term is agreed to until all the terms are agreed to.  The objective is to negotiate a total “package” that is acceptable to the client without necessarily focusing on its constituent elements such as “salary,” “bonus,” or “vacation.”

Ensuring a Former Employee’s Cooperation

If there is substantial push back from the employer, the employee has several arrows in his quiver. Sometimes, the employer is facing existing or threatened litigation and the departing employee may be called to testify by or on behalf of the company.  The former employee’s assured cooperation has value to the company.  By the same token, there may be need of a substantial transition process as responsibilities are shifted to the departing employee’s replacement. 

A short or medium term consulting agreement ensures the former employee’s availability and commitment, and has the added potential benefit of allowing payments to the former employee to be spread out over multiple accounting periods, thereby reducing their impact on the bottom line.

Offer Letters

Offers of new employment require equal scrutiny and analysis.  Of course, employers jealously guard and protect the “employment at will” relationship and, in the absence of an enforceable contract, there is little that can be done to change that.  There are, however, important provisions that can be added to an offer letter to make the new position more attractive. 

For example, where a departing employee is forced to forego the vesting of stock options or other benefits, the value of those benefits can be added to the offer as an employer buy-out.  Similarly, offer letters now more frequently address termination and severance, as both employers and employees take a more realistic view of the fact that employees come and go, and sometimes have to be let go.

Traditional offer letter issues, such as the duration and geographic reach of a non-competition provision, remain fertile areas for negotiation and compromise.  The rules for extending an offer of employment have changed to the extent that there now are no rules. The content of a particular offer letter is constrained only by the imagination (and ingenuity) of the employer, employee, and their respective counsel.  Suffice it to say, however, that as offer letters have grown more comprehensive and complex, so, too, has the need for experienced counsel to undertake their review and analysis.

 

The attorneys at Maya Murphy, P.C. have extensive experience in all aspects of employment law, including the preparation and review of offer letters and severance packages.  For additional information, call at (203) 221-3100.