Negotiating Severance Agreements
Parties bargaining to reach a mutually acceptable outcome must, as with any negotiation:
- Have a shared desire to resolve the dispute;
- Identify the interests at stake;
- Invent options for mutual gain;
- Share or restrict the flow of information between the parties;
- Understand how to use, create and counteract leverage; and
- Use objective criteria for evaluating claims and defenses;
Negotiating Severance of Settlements in Employment Disputes
Negotiating employment settlement agreements typically involves positional bargaining, with the employee making an initial high demand and the employer responding with a low offer. The employer and employee offer and counteroffer through several cycles and move towards a mid-point. If they reach common ground, they settle. If not, they reach impasse and the employee decides whether to take the final offer or file suit.
The employee’s initial demand should be based on a specific settlement goal that is, in nearly every case, the maximum amount that the employee believes the employer will pay to obtain a release from the claim. This is driven by applying the same claim valuation techniques that the client used, except from the employer’s perspective.
If the employer shares the employee’s view of the facts, including the employee’s chances of prevailing and the damages that the employer will have to pay, the employee and the employer will nonetheless value settlement differently. For the employee, the value of the claim is reduced by future litigation costs. For the employer, the value of a release is increased by the avoidance of future legal fees, since “winning” actually involves losing an amount equal to the defense fees. Thus, employers and employees should value the claim similarly, except that both have an incentive to avoid legal fees. This creates a win-win scenario for early resolutions, unless negated by an employer preference to pay its own attorney rather than the former employee.
Once the employee makes a best guess as to the maximum amount the employer will pay, the employee should craft a settlement demand that leaves enough room to move to get there. There is no magic in crafting this demand. However, unless the employee is in a very strong negotiating position, he or she should avoid a “take it or leave it” demand based on what he or she expects the employer to pay. Conversely, a demand that is two times or more greater than the employee’s goal risks signaling that the employee is unrealistic about settling.
Negotiating severance pay involves a factor unique to the employment setting, being the value or risk of reinstatement. In the example used for Valuing Claims, the claim valuations focused on the back pay awarded (or not) to the employee at the conclusion of a trial. A back pay award remedies the harm caused by the unlawful termination up to the time of trial, but not beyond. If the discharged employee has not found comparable employment by that time, the court can remedy the ongoing damage with an order for reinstatement or for front pay.
Courts prefer to deal with future losses by ordering the employer to reinstate the employee to the position he or she would have been in absent the unlawful termination. Not every employer can or will reinstate the employee, however. If reinstatement is not feasible, then the court can order the employer to pay front pay in an amount that will compensate the employee for future economic losses.
Reinstatement may have significant value to the employee. For example, if the employee has yet to find a better job, reinstatement is economically attractive. For the client who has some protection from retaliation, such as those covered by civil service laws, reinstatement may have significant value. Where both parties are willing to accept reinstatement, it is often the least cost, fairest and most efficient way to resolve the employment dispute, especially early on.
The problem with reinstatement is that the employer, the employee or both may not want it. If one of the parties does not want reinstatement, the bargaining can change dramatically. Suppose, for example, that the employee demands reinstatement, but the employer refuses. The employee can counter with a demand for front pay. In our example above, front pay is worth $30,000 a year in lost pay and benefits until, in the court’s opinion, the employee will return to a job with the earnings and benefits that he or she lost. Assuming five years of front pay and benefits, this amounts to $150,000 more for the employee. This doubles the value that the employee can objectively claim if the employer refuses reinstatement.
If the employer offers reinstatement but the employee rejects it, the employer can seriously undermine the employee’s leverage in the negotiating process by making an “unconditional offer of reinstatement.” This is a highly defined legal maneuver that basically amounts to an offer of reinstatement while the lawsuit goes on. If the employee refuses, the employer can escape further back pay liability, even if the employee eventually wins the lawsuit. Without a claim for back pay and having signaled that he or she does not want to return to work, the employee has little to gain from the lawsuit, the source of his or her leverage.
To use the opportunity for reinstatement effectively, the attorney representing the employee should gauge the employee’s willingness to explore reinstatement. Unless the employee adamantly opposes it, he or she should seriously consider asking to return to work or, at the least, not to communicate his or her aversion to reinstatement.
However the employer and employee value the employee’s claims and craft their respective bargaining positions, at some point the employer will refuse to increase its final offer and the employee must decide whether to accept or reject it. At that point, the employee should return to his or her valuation of the claim and, if the severance offer meets or exceeds it, the employee should accept the severance offer. Conversely, if the offer is less than the value of the claims, the employee can reject the offer and pursue the claims.
Ford and Hornberger, "Settlement Agreements For Employment Termination Cases (With Sample Clauses And Forms)," The Practical Litigator (March 2010), pp 11-28.
Related MEL Links
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- Severance Package
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- How does severance pay affect unemployment benefits?
- Is it wrong to attempt to obtain employment from a comapny that paid you severence pay years ago?
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- Can companies set requirements to withhold servence pay from older workers
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