How to Value Claims for Severance Negotiations

posted by Neil Klingshirn  |  Jul 14, 2009 5:41 PM [EST]  |  applies to Ohio

This article describes a process for employment lawyers to use to place a value on a severance pay offer. It involves identifying claims, identifying the damages associated with those claims, discounting that value for the likelihood of failure and reducing that value by the costs of litigation.

Overview

Attorneys representing terminated employees must identify the employee’s potential claims, whether arising out of the termination or otherwise, the evidence supporting them, the likelihood that the employee will prevail and the costs involved in pursuing the claims.  This analysis results in a rough valuation of the employee’s claims.

If the claims have a positive value, the employee can consider pursuing a case.  If severance was offered, the attorney can recommend whether to accept the severance in light of the value of the claims. If the matter can settle, the attorney representing the employee should seek the highest severance payment possible, plus favorable tax treatment, positive references and other non-monetary terms.

Five Steps to Severance Negotiation

When a terminated employee consults an attorney, the attorney should:

The Initial Consultation

An initial consultation should allow enough time to identify claims, estimate their value and review options for pursuing them. A reasonable fee, if disclosed at the outset, is appropriate.

Individuals who seek a consultation are entitled to the protections and privileges that arise out of the attorney/client relationship. The scope of this relationship should be carefully limited in the consultation agreement.

Before the consultation, the client should provide that attorney with relevant documents and complete a questionnaire. This questionnaire can also contain the consultation agreement. If the individual is accompanied by someone else, such as a spouse, friend or a potential witness, the attorney should caution the client that allowing someone else to participate in the consultation could constitute a waiver of the attorney/client privilege. In some circumstances, it may be appropriate for the client to waive that privilege, but that must be done knowingly and after full disclosure.

Most consultations begin with the simple question, “what is going on?” The individual is usually able to present a specific problem and the context in which it arose. This is the problem that deserves the most attention. In addition, the attorney must identify other potential claims, such as unpaid overtime or failure to notify the employee of COBRA rights.

The attorney should investigate whether the problem has a legal solution (i.e.,gives rise to a claim). If not, the lawyer must explain why a serious unfairness is not unlawful.  If the problem does give rise to a claim, the attorney needs to evaluate the claim and then value it by comparing its costs to its potential pay outs. In reality, few claims have sufficient value to justify pursing them, since the law limits the damages that the client can recover, the client runs a substantial risk of losing and the client must pay significant costs to pursue the claim.

Valuing Claims

Every employment claims has certain specific, defined elements. These break down into liability facts (i.e., whether the employer violated a legal duty) and damages. The specific elements of each employment claim is beyond the scope of this outline. For each claim, however, the attorney representing the employee  should identify some evidence that will support each element of that claim, including damages.

Evidence

An excellent way to identify evidence is to begin preparing for the motion for summary judgment during the initial consultation. Sources for evidence include:

If an employer offers severance in a reduction in force, the employer must provide a list of job titles and the ages of the incumbents terminated in the RIF, along with a similar list of titles and ages of incumbents not selected for the RIF. The client should bring this to the consultation. For documents or statements that the client does not have in his or her possession, the client can usually identify whether it exists and help the attorney make an inventory.

Once the attorney obtains or takes an inventory of expected evidence to support each claim, the attorney can make imprecise but useful predictions about the outcome for each claim. For example, if clients cannot provide or point to evidence going to certain elements of their claims, they will lose those claims.  If clients have no evidence other than their own testimony, they will probably lose those claim as well. Someone or something else needs to back them up. If the clients have corroborated evidence going to each element of a claim, however, the attorney can make a rough estimate of their chances of winning at trial.  The attorney should avoid exuberant optimism at this point, however, since much can go wrong between the initial consultation and the conclusion of trial.

Damages

Employment laws limits damages available for each type of employment claim. To value a claim, the attorney must know the limits and calculate the maximum amount available if the employee prevails. 

Most employment law damages involve “make whole” relief, which attempts to place the employee in the place he or she would have been but for the unlawful termination. Make whole relief includes:

Some claims permit the employee to recover money damages for emotional pain and suffering, an award for the employee’s attorneys’ fees and costs, liquidated damages or other relief. In addition to make whole relief, employees in many types of employment cases can pursue punitive damages. Punitive damages serve a different purpose than make whole relief and are not tied directly to a measure of the harm done to the employee.  They are much more difficult to obtain and predict with any certainty.

A full discussion of the types of damages available for each type of employment claims is beyond the scope of this article.  However, the attorney must know the maximum amount that the client can recover for each type of case. In some cases this amount can be substantial, especially where the employee can recover for severe emotional harm. In most cases, however, provable employment damages result in reasonably predictable, five to six figure verdicts.

Costs and Fees

Employment litigation typically costs at least $5,000 in out of pocket costs and will require substantial attorney time. The attorney should estimate the number of hours of attorney time required to take a claim to verdict. Two hundred hours is a reasonable guess for most types of employment claims.

Attorney time and costs must be factored in for a fair claim valuation.  Most clients, however, expect to pay the attorney on a contingency fee basis and therefore do not consider the attorney fee their cost for pursuing the claim.  This will distort the value of the claim and make it appear more valuable to the client than it really is. To correct the distortion, the attorney can ask the client to assume that he or she will pay the attorney on an hourly basis.

This is usually unrealistic, so we acknowledge that fact and ask the client to pretend that a rich relative left them a substantial inheritance that he or she can use to pay the costs of litigation, except that the deceased relative required them to make sure that pursuing a claim is a good investment. This approach results in a more realistic valuation of claims and puts the employee in the shoes of the attorney who is asked to take the case on a contingency fee basis. If the client would not invest in the claim because the payoff will not cover the costs, the client cannot expect the attorney to do so, either.

Calculating a Value

Armed with a rough estimate of the client’s chances of success, the maximum amount recoverable if the client succeeds and the costs that the client will incur, the attorney can estimate the value of the client’s claims by multiplying the maximum amount recoverable by the percentage chance of success and subtracting from that amount the litigation costs. For example, assume that a client with some evidence for each element of an age discrimination claim was terminated from a job paying $40,000 a year, with a benefit package worth another $10,000 a year. She is qualified for other employment, but expects her age and market conditions to result in a 6 to 12 month delay in finding new employment that will only pay $30,000 and will not have benefits.

Since she has an age discrimination claim, she can recover compensatory damages for emotional pain and suffering but, because she will choose to pursue only a state law discrimination claim, she will not be entitled to attorneys’ fees. Further assume that her case will take two years to reach a verdict and will cost $55,000 in costs and attorney time. Finally, assume that the client has a 50% chance of prevailing at trial.

Based on these admittedly imprecise assumptions, the attorney can suggest a value for the client’s age discrimination claim. That is, she will lose roughly $100,000.00 in salary and benefits over those two years but will reduce that loss by  $30,000 to $45,000 as a result of finding new employment. This reduces her lost wages to $55,000 to $70,000.  Assuming an emotional pain and suffering award of 50% of the lost wages, this age discrimination victim will have a potential recovery of between $80,000 to $105,000.

With a 50/50 chance of winning, however, the risk adjusted value of an $80,000 to $105,000 recovery is actually half of that, or $40,000 to $52,500.  Since the claim will cost $55,000 to recover, its risk adjusted value net of costs is thus close to or below $0.

This sobering assessment is probably the most important piece of information for an employee interested in pursuing claims in court. Without a realistic understanding of what he or she will actually recover, the client cannot make a sound legal decision about his or her legal options for pursuing her claims.

Options

Terminated employees with potential claims have several options. These include pursuing the claim, releasing the claim in exchange for a severance or settlement payment or doing nothing.

Employees whose claims have a value at or below $0 generally should not pursue them. By hypothesis, filing suit on a claim with a net value under $0 is not a wise investment. Filing suit will probably not make the investment any wiser. The employee may, however, be in a position to negotiate severance or a settlement, although his or her leverage will be low.

Conversely, employees can profitably pursue claims with a positive net value unless the employer offers severance or a settlement equal to or greater than the value of the claim. Before filing suit, therefore, employees with a positive claim value should solicit a severance or settlement offer.

posted by Neil Klingshirn  |  Jul 14, 2009 5:41 PM [EST]  |  applies to Ohio