There are many circumstances under which your position as a CEO or senior executive can come to an end. These usually fall into one of two categories: either the employer is the moving party or you are.
When negotiating employment contracts, many CEOs and senior executives focus primarily on the former, neglecting the fact that a carefully drafted executive severance package is just as important to you when you are the moving party in the separation.
This article talks about the circumstances for seeking and then going about obtaining severance when you choose to leave but have not been terminated by your employer.
Circumstances when you want to quit
This circumstance often arises when you lose your champion. The Chairman who championed your hire or perhaps a senior executive to whom you reported has moved on, and you are left with a new boss who wants his own team and is making life harder for you on the job.
The circumstance also occurs with a change in business conditions, such as when a major customer that you were brought in to service has been lost. As a result, your position is no longer attractive to you.
Perhaps the company is moving in a direction you don’t agree with so that you think the company or your sector will become less profitable and it will be unlikely that you will continue to earn the kind of bonus you’ve been earning or depended on.
Perhaps you’ve just lost confidence in senior management and feel the company is in a downward spiral that will affect you negatively both financially and professionally.
In the worst circumstances, you come to question the company’s ethics and methods, and fear that if you stay with the company this may negatively impact your reputation, or worse still put you in legal jeopardy.
All of these are good reasons to want out of your present company. And in such circumstances where you’ve done your job but the company has failed you, it is right to want severance pay when you leave. This is especially true if you want to leave even before lining up your next position.
The terms and conditions of severance in most executive employment agreements are often clearly defined. If the employer terminates you, there are provisions for what the employer must do or what payments and other benefits the company must provide under the agreement.
If you are terminated and can claim wrongful termination based on discrimination or various other reasons, you may be in a position to negotiate much greater severance. To do so, see my earlier article on wrongful termination.
But what if the employer does not terminate you and you want to leave? Can you still get a severance under those circumstances?
Under the circumstances where you take action to separate from employment, with careful planning and strategy you may still be able to achieve or negotiate an executive severance package.
To be able to leave and trigger severance, it is best to have dealt with this situation when you first negotiated your job offer or employment contract. The severance remedies that the contract provides if the employer terminates you without just cause should also be written to be available to you if you quit your employment for good reason. What is good reason?
Generally, you want to be able to quit if there is any reduction or certainly any material reduction in your pay or benefits, your job title, duties, responsibilities or authority in the company.
However, if you can, you may want to try to add more. In taking this position, did you have any specific expectation of company policy and direction? Was there something your prospective boss told you about the company’s present make-up, its financial position or its plans that you relied upon in taking the position? If there was, if possible, you would want to include that representation in the contract. Thus, if the company failed to live up to its representations to you, it could be a basis for you to quit for good reason and trigger severance.
It could be that when you joined the company, you were not in a position to include these kinds of provisions for termination by the employee for good reason. However, if you have proved yourself and are up for a pay raise, that might be the right time to try to include these terms in an updated employment agreement.
Circumstances of Constructive Discharge
What if you don’t have and can’t get a termination for good reason clause in your employment offer or contract? Can you still seek severance if you want to leave but your employer have not and will not fire you?
It may still be possible to get severance under these circumstances. Your main justification is the legal doctrine of “constructive discharge.”
This situation would likely arise if your employer wants to get rid of you but, in order not to trigger the terms of the executive severance package, actively tries to make the conditions of your job so untenable that you are left with little alternative but to resign your position. Although technically a resignation, the law may ultimately consider such a separation a constructive termination or discharge which might then be deemed to trigger the severance provisions of your employment agreement.
Discrimination regarding a promotion decision is a possible example of such impermissible employer conduct. Permitting, perhaps even creating, a hostile and offensive work environment through sexual harassment is another. Additionally, if the employer significantly cuts your pay or emasculates your position – with a significant reduction in responsibility or essentially assigns all your work to someone else – those, too, would be strong grounds for constructive discharge.
What do you seek if you face constructive discharge? The easiest answer would be to be paid the same amount and receive the same benefits as if you were terminated without cause.
On the other hand, in case your contract is at will and has little protection for termination without cause, if there is constructive termination that includes an element of discrimination, such as age, gender, race or national origin discrimination, you can seek severance based on your loss as result of their discrimination. This can include the following elements:
- Severance pay – payment of your salary for a number of months, a year or longer based on past custom of the company or industry
- Bonus – payment of a lost bonus or a prorated bonus for the current year
- Equity – restitution of any lost options, restricted stock or RSUs, forfeited as result of the termination or constructive termination
- Benefits – continuation of medical and dental insurance coverage and other key benefits during the severance period.
Getting what you deserve if you terminate your position
As said before, if things are not right in your executive employment and you feel you have to leave, it is wise to seek executive employment counsel in those circumstances to see if you can leave and obtain some severance in connection with your termination. Where you, as a senior executive, have done your job for the company but now the company has let you down and it is time to leave, it is only fair that the company pay a severance – and you ought to seek that.
Written by: Robert A. Adelson, a business and tax attorney, and partner in the firm Engel & Schultz LLP in Boston, MA.