Leaving Your Job? Don’t Sign Your Severance Agreement Just Yet
Severance Agreements: Key Takeaways
- Don’t rush to sign: A severance agreement is a legally binding document that can affect pay, benefits, and protections when leaving a job. Keep in mind that additional compensation usually comes with conditions, so review everything before signing.
- Know what you’re owed: Pay stubs, employment agreements, and other records prove what you’re entitled to and strengthen your position when negotiating severance.
- Get an employment lawyer: An experienced employment attorney can spot hidden risks in your agreement and help you avoid common mistakes.
A severance agreement can cost you thousands of dollars if you don’t know what’s buried in it.
Our advice? Ask an employment lawyer in San Francisco to go over the document with a very fine-tooth comb. Otherwise, you risk losing unpaid wages, bonuses, and the opportunity to sue your employer for legal violations, such as wrongful termination or discrimination.
It doesn’t matter if you’re an executive or not. Before signing, you should know exactly what you’re agreeing to.
What Is a Severance Agreement?
A severance agreement is also known as:
- A severance package
- A separation agreement
- A transition agreement
Basically, it’s a contract between you and your employer that spells out what happens when your job ends.
Usually, a severance agreement includes a lump sum of money or other benefits on top of what you’re already owed. To get these perks, you’ll probably have to sign something called a release of claims, which means surrendering some of your rights.
Your employer might ask you to sign a severance agreement if you’re:
- Fired
- Laid off
- Resigning voluntarily
- Leaving under a company transition plan
Whatever the circumstances, it’s meant to create a clean break between you and your employer, so neither side is left with any unresolved claims or disputes.
In theory, everyone moves on smoothly.
In reality, the agreement might contain small print that comes back to haunt you. For instance, you might be asked to waive rights you didn’t know you had, such as the ability to sue your employer for unfair treatment.
That’s why it’s necessary to review everything line by line, word by word — or let an attorney with employment law experience do it for you. They can identify the benefits and protections available to you under federal and California law and negotiate better terms.
Consider this scenario: An employee leaving a company in SoMa is offered 2 weeks of pay for every year she worked. When an attorney checks her employment agreement, they find she is actually entitled to 6 months’ pay. That’s a difference of tens of thousands of dollars.
Severance Agreements: What You Could Gain and Lose
A severance agreement is a legally binding document with potentially serious financial consequences. So, you really need to know what you’re signing.
On one hand, it can give you benefits like:
- Extra pay for time worked
- A large bonus or additional compensation
- Payment for keeping company information confidential
This can make leaving a job a little easier financially.
On the other hand, you might have to forfeit certain things, such as:
- Unpaid wages
- The right to sue for discrimination, sexual harassment, retaliation, or breach of contract
- Stock options or equity
- The chance to respond to claims from your employer (legal demands they could make against you)
The takeaway here is that a severance agreement might seem tempting at first, especially with a big lump sum. However, you may discover it comes with strings attached.
The good news is that you don’t have to accept a severance agreement as-is. The right paperwork and an employment attorney can help you negotiate much better terms.
Documents to Support Severance Negotiations
Make sure you have proof of what you’ve earned in your role and what you’re entitled to. Documents you need include:
- Pay stubs, payroll records, and timecards (evidence of how much you’ve actually been paid)
- Employment agreements, handbooks, and offer letters (shows pay, bonuses, and benefits)
- Change-of-control (COC) agreements (relevant if your company is being acquired)
- Performance evaluations (can support your case for higher severance if your performance was good)
- Incentive plans, commission plans, and stock options (shows additional pay or equity you may be able to claim)
- Executive retirement agreements or ERISA plan documents (if applicable)
Don’t have these on hand, or can’t find them? Under California Labor Code section 226(f), your employer must provide copies of any requested documents within 21 calendar days or pay a penalty.
Research Your Employer’s Severance Practices
Even if your employer doesn’t have a formal severance policy, past practices can create an implied entitlement. This is what we mean:
- Say your company paid one week per year of service for layoffs in the past. You could argue that you’re entitled to a similar severance package now.
To support negotiations, search for documented examples, such as written policies or HR emails confirming severance amounts. Don’t rely on rumors about what others received — you need hard evidence.
Review the Terms of Your Agreement
Severance agreements can vary enormously. Here are some areas to check:
Severance amount and structure
- Lump sum vs. continued salary: A lump sum severance amount gives you immediate cash, while a continued salary spreads your payments over time. With the latter, you may need to follow certain conditions to keep getting paid, such as not competing with your employer.
- Executives/higher-level staff: These employees could be entitled to higher severance if they’re terminated without cause or the company comes under new ownership.
- Bonuses and stock options: See whether you can receive pro-rated bonus payments or extend the exercise period for stock options. A severance agreement lawyer can ensure proper calculation of these benefits.
Releases and legal protections
- Mutual release: Check whether your agreement releases both you and the company from making claims in the future. If it does, you’ll be waiving some of your rights.
- Cooperation clauses: Make sure your agreement has clear limits on your obligations after leaving, so you’re not tied to company lawsuits forever.
- Directors and officers (D&O) insurance: If you’re a director or officer, check that your coverage continues after departure.
Non-disparagement and references
- Non-disparagement: An agreement shouldn’t stop you from speaking honestly about your work in the future.
- References: Consider negotiating a reference letter and its contents.
Other Things to Consider After Receiving a Severance Agreement
We also recommend reviewing the following:
Age discrimination
If you’re over 40, the Age Discrimination in Employment Act (ADEA) protects you against being treated unfairly because of your age. Your employer must give you a review period before you sign a severance agreement and a short revocation period afterward.
Classification of departure
How your departure is described (resignation, termination, retirement, etc.) can affect your eligibility for unemployment benefits, equity, stock options, deferred compensation, and COBRA health insurance coverage.
Unemployment benefits
The timing and structure of severance can impact eligibility for unemployment. For example, a lump-sum payment might allow you to report no income for a while and start collecting benefits sooner.
Taxes on deferred compensation
Meet with a tax attorney so you don’t get hit with penalties (IRS Code Section 409(a)).
Non-compete and non-solicitation
Check whether your agreement has non-compete and/or non-solicitation rules. Push back if they’re too restrictive, or you could limit employment opportunities.
Tip: In California, non-compete clauses are generally not enforceable, but employers almost always insert them anyway.
Why You Need an Employment Lawyer for Severance Agreements
Negotiating a severance agreement isn’t just about asking for more money. You’ll also need to:
- Identify anything that seems unfair or illegal
- Ensure you don’t give up pay, benefits, and rights
- Understand what you’re being offered
Michael Seville, an experienced employment lawyer at Stoll & Haynes, can help you check your agreement and negotiate terms that protect your rights. Known for his commitment to workplace justice, Michael spots issues that most employees miss.
Severance Agreements FAQs
What should you do before signing a severance agreement?
Review the agreement carefully, ideally with an employment attorney. Legal review isn’t just for executives; anyone leaving a job can benefit.
Can I negotiate my severance agreement?
Yes. Negotiation is often a smart move because you can potentially improve terms and increase your payout. For the most successful outcomes, work with a San Francisco employment lawyer for severance agreements.
What happens if I sign my severance agreement without reviewing it?
You could lose access to unpaid wages, bonuses, claims, and future legal protections. Never assume that a severance agreement has your best interests in mind.
Disclaimer: This article is for general information purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship. If you need advice about your specific situation, please contact Stoll & Haynes directly.