Jump to Navigation

What Is A Severance Package?

John Maher: Hi. I'm John Maher. Today I'm here with Samuel Perkins, a founding partner of Brody Hardoon Perkins and Kesten in Boston, Massachusetts.

Sam has been lead counsel in dozens of jury trials in the Federal and State Courts of Massachusetts and Vermont, and his diverse practice areas include commercial litigation and employment law.

Today we're talking about severance packages. Welcome, Sam.

Samuel Perkins: Good to be here, John.

What is a severance package?

John: Sam, what is a severance package?

Samuel: A severance package basically is compensation that an employee receives from an employer when they are wrapping up their work. Typically severance packages are offered by large employers in a situation where an employee has had some years of service and as part of the employer's public relations and way of dealing with employees to maintain morale.

The employer feels the need to provide a severance package so that employees know that when it's time to go, they're not going to go empty handed.

Are severance packages contracted?

John: Is this something that somebody, when they start at a company, would have severance package? Or, is this something that's offered to an employee later, after they've been at the company for some time?

Samuel: In very limited circumstances, there are employment contracts, usually for highly compensated executives, which include from the outset a severance deal, so the executive knows what he or she is going to be receiving when they leave the company.

Those are relatively uncommon. More often severance packages come up -- say if you're from a large financial services company or middle management -- they come up at the time they decide to lay you off.

Negotiating a Severance Deal

John: What steps should I take in negotiating a severance deal before I am laid off?

Samuel: One of the important things about severance packages is that unless you have a union contract or you're a public employee who is protected by civil service, we have an individual contract letter agreement with the company.

Most Massachusetts workers are employees at will, which means you are not entitled to a severance. You have no guarantee of severance at the time you leave. A lot of employees think because companies have a policy of giving severance that that means they're legally entitled to it.

That typically is not the case. You don't have to be treated the same as other employees who have received severance packages. Companies do try to be consistent about what they offer people when they leave, so there is often a severance policy that big companies have when they're laying you off.

The important thing to know in being laid off is, typically, this is not something the employee has sought or is looking forward to. It's important to consult with a lawyer in order to find out whether you have claims against the company that could lead to a much bigger severance package.

Claims that could be asserted, like discrimination claims, which you would be waiving in exchange for a bigger severance package.

What's included in a severance agreement?

John: What is a severance agreement, and what's normally included in that?

Samuel: At the time you leave a company, the company's primary concern is that they want to make sure it's a clean break, and you do not leave with claims that you could assert against the company later on. Particularly if you find out later that you've been treated differently from other people.

A severance package, in essence, is a legal contract between you and the company in which you agree to give up all of your claims against the company, in exchange for their making payments and providing certain benefits to you.

John: Does that mean that if I do feel like I have a claim against the company for maybe being wrongfully terminated or something like that, does that mean I perhaps should not sign a severance agreement? Maybe you could explain a little bit about what wrongful termination is, and how that affects a severance negotiation.

Samuel: Just to use an example, a client of ours, who was a highly compensated accountant in one of the large accounting firms, she was laid off and offered a severance package. We consulted with her, and it became clear she had potentially valuable gender discrimination and potentially age discrimination claims against the company.

It was important for her to consult with a lawyer and know that she had those claims. That allowed us to basically tell the company that she had the right to sue them for these discrimination claims and that the severance package had to be substantially increased before she would agree to sign anything.

Typically what happens when there is a layoff is the company will provide a written agreement to the employee which lays out the claims they're giving up.

It gives them a time period to consider the severance package which, under federal law, if they have a potential age discrimination claim, is at least 21 days, then it basically says that if the employee doesn't accept the package, then there will be no benefits paid at all.

And it's during that period, the 21‑day waiting period, that people who have been laid off should consult with a lawyer and find out if they have claims that will improve the value of their case.

Severance Pay Laws

John: Are there some specific severance pay laws in Massachusetts that help to protect me and my severance deal in the event of being laid off?

Samuel: There are no laws that apply specifically to severance packages or deals. Obviously there is a full range of laws that give employees potential claims if they've been treated unlawfully by the company. There are wage and hour laws concerning timely payment of wages, overtime laws about overtime. Obviously there is age and gender, sexual preference, religious discrimination, racial discrimination.

All the unlawful discrimination laws at the state and federal level also apply to an employee who is leaving and you can negotiate over those as part of the severance package.

What should I make sure is included in a severance package?

John: What should I make sure is included in a severance package before I sign it? On the other hand, maybe what should I make sure is not included in a severance package before I sign it?

Samuel: Most severance packages really are loaded up by the employer with protections for the employer. To the extent that employees these days normally have signed non‑competition and non‑solicitation and protection of intellectual property agreements during their employment, severance packages usually require the employee to sign those again to reaffirm them. Or to sign new ones to protect the employer against competition or for theft of its ideas.

An employee needs to make sure that they've considered what really is a benefit to them. Obviously the primary element of a severance package is, how much you're going to be paid and on what terms.

Is it going to be paid out in intervals, the way you used to receive your own salary? Is it going to be a lump sum payment? Sometimes it's important for the employee's financial interest to get it in a lump sum. Usually employers want to pay it out over time.

Employees need to think about their eligibility for unemployment. Typically if you're signing away the right to sue an employer, you can apply and receive unemployment simultaneously with your severance funds.

Employees also need to think about whether they want out‑placement help, which employers often throw into the package as one of the standard options, so employees can look for new work.

Obviously you want to be thinking about the status of various benefits, like your ability to sign up under COBRA to continue your health insurance coverage.

John: Great -- that's all excellent information. Samuel Perkins, thanks very much for speaking with me today.

Samuel: It's a pleasure.

John: For more information about Brody Hardoon Perkins and Kesten, visit the firm's website at bhpklaw.com or call 888‑877‑6393.

BHPK LAW | Mediation Group | www.bhpklaw.com

Privacy Policy | Law Firm Marketing by FindLaw, a Thomson Reuters business.