I routinely receive calls from employees who have left employment, or are thinking about leaving employment, who ask “What severance am I entitled to receive?” or some other similar question. Often, these callers have the misunderstanding that all employees who leave or are forced to leave employment are entitled to some sort of severance from their employer. I thought this article was a place to start a short discussion on what a severance is and some common issues associated with them.
What is a severance agreement?
A severance agreement is a contract between an employee and employer laying out the terms of the employee’s separation from employment. A severance agreement typically has a number of standard terms. Some key provisions include:
Release of Claims. This is also referred to as a “release.” Simply put, the employer will require the employee to release any and all legal claims that the employee may have against the employer, its employees, insurers, attorneys, etc. etc. In other words, the employee agrees that it can’t and won’t sue the employer. This is the provision in the agreement that is most important to the employer. They want to be sure that the employee will not come back and make a legal claim against them in the future.
Consideration. In exchange for the release, the employer needs to provide the employee with something of value. Typically, it takes the form of money. It may also include other non-monetary terms such as a positive letter of reference.
Confidentiality. The employer will almost always require the terms of any severance agreement to remain confidential. However, in the case of a public employer (like the City of Minneapolis), the terms are required to be public because government entities are required to share its dealings and financial transactions with the public.
Non-disparagement. Simply put, the parties agree not to say negative things about the other.
Who is entitled to severance?
As a general rule, employers are not required to offer their employees any severance, regardless of how the employment ends. So even if your employment is involuntarily terminated due to no fault of your own, the law does not require your employer offer you any severance.
Some employers have a formal severance plan which they offer as a part of their compensation package. In those instances, the employer is required to provide a predetermined amount of severance (e.g. a week of pay for every year of service) in the event an employee separates from employment and qualifies for coverage under the severance plan. Depending on the plan and the type of employees, these can often be somewhat complicated arrangements.
How is the severance amount determined?
There are a number of factors that go into determining the severance amount paid to the employee. If there is a formal severance plan, that typically will govern. In the absence of a severance plan, oftentimes an employer will consider the employee’s position, pay, length of service, contributions to the company, and other similar factors. However, the single biggest factor to influence the amount of severance pay is whether the separating employee has any viable legal claims against the employer, and how much they may be able to recover in the event the employee can prove they were fired illegally. Remember, the employer is essentially “buying” a release of claims from the employee. If the employee has strong legal claims she could bring against her employer, the release of those claims is worth more money. The employer has an incentive to pay more to a former employee with strong claims because if they don’t pay more, the employee may choose to not to release her claims and sue the employer to recover more in court.
In other instances, an employee may have held a position of leadership or influence for which an employer wants to part amicably. These employees may have access to media attention that could be unflattering to the employer. In these cases, the employer is doing an analysis of what it is worth to them to not have this senior employee out in the community bashing or criticizing the organization. Oftentimes, that can be worth a lot to an employer.
This brings us back to Janeé Harteau. She was asked to resign because in the view of the Mayor, she wasn’t doing a good job. So it does not appear her leverage comes from having a particularly strong claim for discrimination or other form of wrongful termination. Rather, the City is entertaining paying Harteau a severance because she is someone with significant name exposure, who has been at the center of a heated public debate (police shootings), and who could significantly damage the City’s attempts to mend whatever fences it believes need mending in order to help the community move past these incidents. I wouldn’t be surprised to she receives a payment commensurate with a year or two of her annual pay. Stay tuned and see if I am right…