Severance agreements are critical contracts that outline the terms of separation between an employer and an employee, often involving financial compensation, benefits, and other considerations. For C-level executives (CEOs, CFOs, CTOs, etc.) in California, severance agreements carry additional layers of complexity, given their leadership positions, the stakes involved, and the potential legal implications.
It’s important to review and negotiate these agreements effectively, as they not only define your departure from a company but can also impact your career trajectory and financial security. A skilled California employment attorney with experience in evaluating and negotiating C-level severance packages can provide you with strong legal representation to protect your rights and interests.
👉Also Read: When It’s Best to Hold Off on Signing a Severance Agreement: 5 Cases to Consider
The Basics of Severance Agreements
A severance agreement is a legal contract that outlines the terms and conditions under which an employee will leave a company. Severance agreements typically include financial compensation (severance pay), health insurance continuation, stock options, retirement benefits, and other perks.
For C-level executives, these agreements often go beyond standard severance packages, addressing items such as non-compete clauses, intellectual property rights, and the handling of equity stakes. A well-negotiated and fair executive severance package agreement can safeguard an executive’s interests and ensure a smooth transition out of the company.
Key Components of a Severance Agreement
- Severance Pay: The amount of money provided to the executive upon termination. This could be a lump sum or installment-based payment.
- Health Benefits: Continued coverage under the company’s health insurance plan, often under COBRA, for a specified period.
- Stock Options and Equity: How unvested stock options, restricted stock units (RSUs), or other equity-based compensation will be handled.
- Non-Compete and Non-Solicitation Clauses: Restrictions on working for competitors or soliciting former colleagues or clients.
- Confidentiality and Non-Disparagement Clauses: Terms preventing the executive from disclosing sensitive information or speaking negatively about the company.
- Release of Claims: A legal waiver where the executive agrees not to pursue litigation against the company for matters covered by the agreement.
Negotiating Severance Pay and Benefits
The primary concern for most C-level executives is the financial and other severance benefits included in their employment agreement. These packages vary greatly depending on the executive’s role, tenure, and the circumstances surrounding their departure. When negotiating severance pay and benefits, a senior executive should consider the following:
Severance Pay
C-level executives often receive higher severance pay due to their significant roles within the company. This payment may be calculated as a multiple of the executive’s annual salary (e.g., 1-2 times the base salary). In addition to the base salary, some severance packages may include bonuses, accrued vacation, and deferred compensation.
Bonuses and Commissions
Executives should ensure that any outstanding bonuses or commissions they earned during their employment are included in the severance package. This could include performance-based or prorated bonus or long-term incentive payments tied to company performance.
Health Insurance and Retirement Benefits
Health insurance continuation is typically provided under COBRA, but executives may negotiate for longer coverage periods or additional health benefits, especially if they have unique healthcare needs. Additionally, retirement benefits such as pensions, 401(k) matching, or deferred compensation plans should be addressed in the agreement, particularly if the executive is nearing retirement age.
Equity and Stock Options
Executives often receive a significant portion of their compensation through equity, such as stock options or RSUs. Severance agreements should address how these assets will be treated upon termination, particularly in cases of unvested stock options and other key benefits of this nature. Negotiating accelerated vesting or extended exercise periods can preserve the value of an executive’s equity compensation.
Non-Compete, Non-Solicitation, and Non-Disclosure Clauses
Many severance agreements for C-level executives include restrictive covenants designed to protect the company’s interests. These provisions are critical and often the most contentious aspects of the negotiation in case of further service relationship.
Non-Compete Clauses
Non-compete clauses restrict the executive from working for a competitor for a specified period and within a defined geographic area. In California, however, non-compete agreements are largely unenforceable under state law (California Business and Professions Code § 16600), except in very limited circumstances, such as in the sale of a business.
While non-compete clauses are not enforceable in most situations, companies may still include them in severance agreements. Executives should consult legal counsel to assess the validity of such provisions and, if necessary, negotiate their removal or modification.
Non-Solicitation Clauses
Non-solicitation clauses prevent the executive or a terminated employee from recruiting the company’s employees or clients for a set period after departure. These clauses are more enforceable than non-compete clauses in California, especially when they are narrowly tailored. Executives should review these provisions carefully to ensure they do not unreasonably restrict future employment opportunities.
Non-Disclosure and Confidentiality
Non-disclosure agreements (NDAs) prevent the executive from sharing proprietary company information. This is a standard provision in most severance agreements. However, executives should ensure that the scope of the confidentiality clause is reasonable and does not unnecessarily restrict their ability to use their industry knowledge in future positions.
Non-Disparagement Clauses
These clauses prohibit the executive from making negative statements about the company, its leadership, or its products. While it may seem harmless, executives should ensure that any non-disparagement agreement is mutual, meaning the company also agrees not to disparage the executive.
Handling Equity Compensation for C-Level Executive Severance Packages
For C-level executives, equity compensation (e.g., stock options, RSUs, and performance shares) is often a significant part of their overall compensation package. The severance agreement should clearly state how unvested equity will be treated.
Vesting of Stock Options and RSUs
The terms of the equity grants, including stock options and RSUs, will usually determine how these assets are handled upon termination. In many cases, unvested stock options or RSUs are forfeited when the executive leaves the company. However, executives can negotiate for accelerated vesting or continued vesting for a defined period after their departure.
Extended Exercise Periods
Typically, stock options must be exercised within a short period after termination (e.g., 90 days). Executives can negotiate for an extended exercise period, allowing them to exercise their options over several months or years rather than immediately after termination. This can help mitigate the risk of making investment decisions under pressure.
Releases of Claims and Legal Waivers
Most severance agreements require the executive to sign a release of claims, which waives the right to sue the company for any issues related to their employment or termination. Executives should review these releases carefully to ensure they are not waiving any rights or claims they might need to preserve.
Types of Claims Waived
The release of claims typically covers employment-related matters, including wrongful termination, discrimination, harassment, and wage disputes. However, executives should ensure that the release does not cover future claims (e.g., stockholder lawsuits or claims arising from the company’s actions after the executive’s departure).
Consideration for the Release
To be enforceable, the release of claims must be supported by consideration—usually in the form of severance pay or other benefits. Executives should negotiate for substantial consideration in exchange for waiving their rights to future litigation.
Tax Implications of C-Level Severance Agreements
Severance pay, further compensation and other severance benefits provided under an agreement are generally taxable as ordinary income. C-level executives should work with tax advisors to understand the tax implications of their severance package and explore strategies for minimizing tax liability.
Golden Parachute Payments
For high-level executives, severance payments could trigger “golden parachute” tax rules, which impose an additional excise tax on certain compensation packages that exceed limits set by the Internal Revenue Code. Executives should ensure that their severance agreements account for any potential tax liabilities related to golden parachutes.
Consulting with an Employment Attorney in California
Given the complexity and high stakes of severance packages for executives, it’s essential to consult with experienced legal counsel before signing any agreement. Employment attorneys can help executives understand their rights, identify potential pitfalls, and negotiate more favorable terms. In the event of a dispute, a skilled California employment attorney for executive severance packages can help negotiate a favorable out-of-court agreement.
Customized Negotiations
Each severance agreement is unique, and executives should not assume that standard clauses will serve their interests. Legal counsel can help customize the severance agreement to reflect the executive’s specific role, compensation structure, and future plans.
Confidentiality in Settlement Negotiations
Executives often want to keep the terms of their severance agreement confidential, especially when negotiating larger payouts or resolving disputes with the company. Legal counsel can help ensure that confidentiality provisions are included in the agreement.
👉Also Read: Essential Factors to Keep in Mind When Negotiating a Severance Agreement
Choose a Seasoned Employment Lawyer in California to Maximize Your Financial Advantage
If you’re a C-level executive in California facing a separation, reach out to Hershey Law today for legal guidance on navigating your severance agreement. Our California employment attorneys will help you negotiate a package that aligns with your professional and financial goals. With a proven track record of negotiating favorable agreements for our clients, we leverage our strategic insights and in-depth understanding of California’s employment laws to ensure that your severance package reflects your true value and contributions.
Don’t leave your future in the hands of your employer—contact Hershey Law today and let California’s dedicated employment attorneys strongly represent you. To schedule your free consultation, call us at 310-929-2190 or contact us online.
