Know Your Severance Rights and Risks

Jitters on Wall Street are well founded for those without preexisting severance agreements.
David McCannNovember 7, 2008

Can Wall Streeters do anything to increase their chances of getting a good severance package in the all-too-likely event of being laid off? Yes — but not a lot.

Top-layer executives of financial institutions generally have employment agreements specifying severance terms. Many other key employees at the firms are required, before employment commences, to sign noncompete or nonsolicitation agreements that will kick in upon departure from the job, in exchange for severance.

Don’t have such a deal? Don’t assume you will get anything, employment attorneys say. That is not to say it’s impossible; in some cases even if there is no preexisting agreement, the company might offer severance to restrict the employee from competing with it for a period of time, notes Kenneth Raskin, a compensation and employment partner at White & Case. But the employer, not the employee, owns that right. Merely asking the firm to provide you with a guarantee of severance in the event of termination without cause is very unlikely to work.

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Indeed, many employees think they have greater rights than they really do, according to Mark Poerio, an employment practice partner at Paul, Hastings, Janofsky & Walker. For example, a common assumption is that a notice period is required in order to terminate without cause. But under the federal Worker Adjustment and Retraining Notification (WARN) Act and various state laws, that is the case only for companies that have a “mass layoff” or a “plant shutdown,” and even then only 60 days’ notice — i.e., severance — is required.

According to a lawsuit filed Tuesday by a former Lehman Brothers computer programmer, workers at the firm were promised 60 days’ pay under the WARN Act in the event of their termination. The programmer, Miron Berenshteyn, says he was fired on September 9 and that his payments ceased on October 3. The suit was filed on behalf of Berenshteyn and 100 other former Lehman employees. According to an article in The AmLaw Daily, Berenshteyn’s counsel, Outten & Golden, expects the class to grow significantly. Plaintiffs are seeking 60 days of wages and benefits plus one week of severance pay for each year worked at Lehman, the article said.

Meanwhile, people also may assume that because a similar-level employee at the firm got a certain severance deal, they will get the same, or that because they’ve been employed there for many years they will get a large severance, Poerio notes. That is only partly true: if the company has established patterns for paying severance based on status or longevity, the employee has leverage to insist on the same treatment. One-off situations provide no leverage.

Employees should try to get documentation of the company’s severance policy. If there is no official, written policy but patterns are evident, something as simple as sending an E-mail to the human-resources department, asking for verification that if you’re laid off you’ll get, for example, three months severance, could be worthwhile. An affirmative reply would serve as valuable documentation in the event of a later dispute.

Companies can minimize the risk of claims based on past severance practices, however, by stating in an ERISA plan that employees have a severance right only to the extent that the company provides written notice of what the terms would be. “The key under federal labor laws is not to have people misled into thinking they have something, then having the rug pulled out from under them,” says Poerio.

Those who do escape with severance pay may wonder how enforceable the noncompete clause really is. One answer is that it differs widely from state to state. In California, noncompetes are completely unenforceable, notes Raskin, though that doesn’t stop companies from putting in the clauses as a scare tactic.

In New York, where much of the financial-services industry is based, noncompete clauses are valid if “reasonable” as to duration, scope, and geography. If a clause says you can’t work for any company in the country for five years, that’s obviously not reasonable. If it says you can’t work for anybody in New York State for the next year in the same industry, that’s probably reasonable. In between those examples, there is room for debate.

However, even when noncompetes are legally enforceable, companies may choose not to pursue remedies, according to Poerio. He normally tells employers that most likely they’re not going to want to spend the money to enforce their rights. Most companies enforce sparingly, he says.

At the same time, Poerio counsels individual executives who are clients to carefully weigh the risks of being dragged into court if they violate their noncompetes. Most of those whose assessment is that their new activities would in fact be violations decide not to go forward, he says. Instead, they develop alternative strategies such as starting a business outside the geographic area covered by the agreement, creating a Plan B to carry them through the agreement’s expiration, or getting sign-off from their former employer on their new activities.