Severance agreements are powerful legal tools that outline the end of a relationship between an employee and employer. Large sums of money are at risk when this employee is a high level executive. It is important that those who find themselves navigating the end of employment as an executive carefully review the language of the contract and a proposed severance agreement, as this often guides the resolution process.
1: What is in a severance package?
Although the particulars vary depending on the company, position, and candidate, a severance or exit package often includes a payment, stock options and continuation of benefits for a set period of time. The payment may be made as a lump sum or periodic. The offer may also include payout for any unused paid time off and career transition support.
It is common for these agreements to include additional documentation when it comes to a package for an executive. Examples can include non-compete agreements and other provisions that specifically address intellectual property as well as waivers that protect the employer from future legal action.
2: What are common dispute triggers in severance packages?
Disagreements over severance usually start with a break in expectations. The company may view the separation as performance based while an executive may see it as strategic or retaliatory. Key triggers typically include:
- Disagreement over termination classification: for cause, without cause, good reason. Disputes often turn on definitional clauses. “Cause” often includes dishonesty, policy violation, reputational harm. “Good reason” often includes pay reduction, title change, relocation, reporting line change.
- Change in ownership: transaction timing, qualifying events, double trigger conditions. An acquisition can result in a “clean the house” mentality, with new ownership coming in and terminating leaders within the organization. This can trigger severance agreements depending on the language of the contracts.
- Incentive compensation conflict: bonus metrics, equity vesting, clawback language. A disagreement over performance metrics can also trigger disputes.
- Restrictive covenant leverage: noncompete scope, nonsolicit enforcement, confidentiality claims. It may be necessary to fight back if the initial proposal is overly broad.
It is wise to realize that these disputes often involve more than just money. The reasoning behind the end of the employment relationship may also trigger board scrutiny, investor questions, regulatory exposure and additional litigation risk. As such, executives should prepare for these impacts when crafting a legal strategy to address their severance package.
3: What is the best path towards a resolution?
Although the best option will depend on the particulars of the case, it is generally wise to begin planning resolution options before the official separation meeting. A clear legal strategy, evidence to back your claims, and preparation for the impact to the company beyond the severance package can increase efficiency when working through negotiations. The legal strategy often hinges on specific provisions within the contract. Before relying on a provision, legal counsel will typically validate drafting consistency, incorporation by reference, signature authority and any amendment history. In addition to use of the severance agreement, side letters, offer terms, equity plan documents and board minutes can also play an important role in building the case.
It is important to tailor each step to the executive’s role, the industry and the governing law. These types of cases can move fast and often involve multiple legal theories potentially including breach of contract, wage payment violations, retaliation, defamation and interference with business relations. It is important to find legal counsel that has navigated these types of claims. We have experience with C-level employment matters and offer free initial consultations.
