There are three basic answers: legal, business and moral considerations.
The employer's legal considerations are the litigation risk whether the employee may pursue potential legal redress. The employer will balance that risk in deciding whether to terminate the employee and in evaluating what can be done to reduce that risk with severance payments. The employer may decide to unilaterally offer separation terms to soften the blow of the termination, condition the terms of separation on paying severance that the employee release the employer from potential legal claims, or pay a kicker amount of severance in exchange for a release. As explained below, the employee needs to evaluate whether to frame the employer's risk aggressively, enlighten the employer of its litigation risk, and whether to search for common ground on the terms of a separation agreement.
Business considerations are potentially very important for the employer. Depending on the nature of the job, company culture and industry, the employer may need to replace the employee, which can be an expensive and time-consuming process. While perhaps no one should discuss a former employee’s termination, word travels. New recruits may be harder to find if the employer is perceived to have mistreated the recruit’s predecessor. The employer has to worry about alienating its existing staff who may spread the word that the employer has mistreated its employees. A poorly conducted termination of one marginal employee could trigger departures of other employees that the employer regards to be more valuable. The cost of that disruption to a business can be significant.
Conversely, many employers worry about the precedential effect of paying severance to someone who was a poor performer or disingenuously claimed the termination violated law. Other employees may follow form and the employer may have more claims to deal with. For example, if a terminating employee raises an issue of sexual harassment, the employer should consider that other employees concerned about losing their jobs may raise the issue too (whether or not a copycat claim is raised legitimately or tactically). Paying more to avoid the risk of litigation with that one employee might be more costly to the employer in the long run. A terminating employee must take the employer's business perspective into consideration.
Finally, there are moral considerations in offering an employee separation terms based on the employee's circumstances, hardship and the employer's notion of fairness. Long term employees occasionally benefit by these moral considerations. However, moral considerations, alone, rarely provide leverage for an employee in a separation negotiation.
Absent an employer policy or implied contract commitment to pay severance (discussed below), there are no established rules or customs about how to calculate severance payments. Some employers offer a day a month of service or a week per year, or even a month per year. This tends to vary by industry, the level of sophistication of the position and the employer’s culture. To argue for better separation terms than the employer is willing to provide, the employee needs to be able to persuasively argue the employer has litigation risk that transcends the employer's business considerations.
At the outset of a separation negotiation, the terminating employee should give careful consideration whether to even try to negotiate for better separation terms and what tone to set if the separation terms are negotiated. If the employee intends to interview in the same city and industry, will “burning bridges” be worth it? Many separation agreements have confidentiality provisions, but word spreads, particularly in close-knit professions and industries. The employee may bolster a separation package by taking an aggressive legal position with the employer, but he may unknowingly lose future job offers. Terminated employees also should never underestimate the loyalty of their former co-workers to the employer. The more aggressive a posture the employee takes in a separation negotiation, the greater the risk there will be of a backlash from colleagues that comes to the attention of prospective employers. That trade-off needs to be carefully considered by the employee.
Some employers also have a “take it or leave it” mentality about separation packages. If the employee argues the employer faces a legal risk in carrying out the termination, but the risk does not sound credible, the separation package may be taken off the table. Negotiating over business considerations rather than just threatening legal action may be more effective with that employer.
The point is that simply asserting an aggressive legal position against the employer in a separation negotiation may not yield the best outcome for the employee. The employer's perspective needs to be considered, the right approach needs to be taken at the outset, and the negotiation may be an opportunity to meet the employee's long term goals after the severance payments have run their course.
There is a large body of employment law on the litigation risk for an employer following a termination. There are some basic principles that apply to this body of law that can help the employer understand those risks and help the employee understand what the employer is thinking (or should be thinking) when they negotiate a separation agreement.
Law students learn quickly that actionable conduct is divided into two basic concepts: torts and breach of contract. Torts are normally “wrongs to the person” while a “breach of contract” is a violation of a legal relationship between the parties. This distinction for lawyers has a history of being muddled in employment law.
Under California law, employment is presumed to be “at will” under Labor Code section 2922, meaning that the general rule is that an employee can be terminated at any time by an employer for any reason that doesn’t violate law (a tort) or breach a contract. The exceptions under employment law nearly swallow the “at will” rule. Further, the public at large generally believes that an employer needs “cause” or “a good reason” to terminate an employee, and a jury expects to hear that ”good reason” after sitting through a trial or it will be suspicious of the employer’s true motives for a termination. Before an employee can cause the employer litigation to be concerned of its litigation risk it in a separation negotiation, the employee needs to be able to articulate a serious tort or a contract theory of recovery that actually has the potential to reach a jury or other fact-finder.
Contract claims fall into three categories: oral, written and implied. As to all three, employer and employee need to evaluate whether the "at will" presumption can be overcome, and, if so, whether their "contract" limits or prescribes the circumstances in which the employee may be terminated.
Most employment contracts are oral, meaning that employees are hired and told their position and salary, but there is no formal written contract. Nonetheless, there is still “a contract” which is an employer’s commitment to pay the employee if the employee performs the assigned work. Of these, there is typically no guarantee of the length of the job or the conditions under which employment may be terminated. However, employees may be able to enforce oral assurances that they will be terminated only after a certain amount of time or under specified conditions, such as “for cause.” This may be an interesting battle ground if other employees confirm that the employer provided them assurances they would be terminated only “for cause.” It is also not surprising for employers to posture a defense around fine print in its handbooks or employment applications specifying that employment at the company is actually “at will.”
Executives often have written employment contracts. These likely determine whether the employee can pursue a breach of contract claim. For example, many employment contracts specify the minimum duration of employment, conditions for termination, or severance guidelines. Union employees essentially have written contracts as set in their collective bargaining agreement (and their rights on termination are likely provided for there as well). The most common disputes about written employment contracts are whether the conditions for an early termination of an employment contract have been met and whether the employer actually had “cause” as it may be defined in the contract.
Implied contract claims are less common because court decisions have cut back their availability. These claims are based on a complicated argument that an employer has “impliedly” established a “right” for its employees to be terminated only (1) “for cause” or (2) after a series of warnings originating from past practices with other employees, or (3) under an established practice of offering severance to its departing employees. The employee needs to be able to establish that the practice is long-standing and that it is not defeated by written documents (such as “at will” language in an employee handbook). Often overlooked is the requirement that the employee “rely” on this "implied" employment practice. The typical reliance argument is that the employee stayed with the employer and built a career instead of pursuing other job opportunities because of the employer's assurances of termination only “for cause.”
Employees that are not "at-will" employees under these principles, may, in very limited circumstances still have a claim for a "constructive" wrongful discharge where the employer has made the conditions of employment so intolerable that a reasonable person in the employee's situation would have felt compelled to resign. That is, sometimes such employees can quit and sue, or then threaten to sue for constructive discharge, and negotiate separation terms.
Employers are often caught off guard by a contention that it has policies that have become “implied contract” obligations to its employees, potentially bolstering an employee’s negotiation stance. Employers may also be sensitive to inadvertently establishing an “implied contract” environment by always offering severance, so an implied contract contention can only be asserted by an employee effectively in a separation negotiation if it is persuasive.
Under these “breach of contract” theories of recovery, an employee can only recover money damages caused by the loss of the legal relationship between the employee and employer. While this may still allow for a claim of years of lost employment opportunity (future lost wages), these claims normally do not permit employees to claim harm to their person (such as “emotional distress”) or to ask a jury to assess punitive damages. And, if the employee is perceived to be able to obtain new employment with little or no future wage loss, the employee has no real litigation risk to posture by a breach of contract claim in a separation negotiation with the employer.
These are too numerous to recite in this article, but tort claims allow for recovery of lost income from a termination and potential harm to “the person” such as emotional distress damages. An employee may have greater negotiation leverage by posturing a tort claim because the employer’s litigation exposure may be substantially higher.Tort claims generally fall into three categories but they confusingly overlap. One large body is discrimination claims. These are generally embodied in state or federal discrimination laws, which specify their own elements, remedies and procedural requirements, including race, gender, age and other protected class discrimination claims. A related area is harassment claims, although what is actionable “harassment” is often misunderstood. We would have to build many more courthouses if every time an employee was "harassed" by the boss the employee could sue. Unless the harassment is “unlawful” harassment, the employee can only pursue worker’s compensation benefits under that system's limited conditions.
A second area of tort claims emerges from a doctrine that an employer’s motivation for termination “violated public policy.” What constitutes “public policy” normally boils down to whether the employer retaliated against the employee for refusing to engage in activity that violated a law (but not necessarily all laws), retaliated because the employee refused to engage in such activity, or retaliated because the employee complained that the employer was engaged in apparently illegal activity. These claims are normally hard to prove, but they are daunting for an employer if provable.
There are many specific employee protections under state and federal law. These statutes often specify what remedies (such as monetary damages and attorneys’ fees) come with them. For example, an employee may have a claim before the Labor Commissioner if he or she suffers an adverse employment action (such as a demotion or dismissal) for engaging in lawful activity outside of work hours away from the place of work (such as social media postings). The courts also have grappled with many situations where there may be a statute or regulation that discusses the activity the employee refused to participate in or objected to and suffered a retaliatory discharge. For example, state and federal law prohibits firing an employee for discussing his or her wages or compensation with co-workers. If the employee was discharged for complaining about conduct of the employer that he reasonably believed in good faith violated law (even if the employer did not actually violate law), the employee may still have a claim. Depending on whether the statue or regulation involved sets forth “substantial public policy” that is “firmly established,” the employee may be able to raise the stakes in a separation negotiation because proving a “wrongful termination in violation of public policy” would present a jury the opportunity to award the employee emotional distress and punitive damages. This can be the other "California lottery" for employees. Employers are reluctant thave any part of it.
There are also many other potential claims for an employee to consider, particularly statutory claims based on an employer’s failure to follow the Labor Code's rigorous requirements. These claims can become the basis for class action litigation for the benefit of other aggrieved employees, which can be financially devastating for an employer far exceeding the value of the employee’s claim. However, this risk needs to be carefully presented to an employer because an employee’s personal claims and such class claims should not be negotiated together, nor one at the expense of the other.
Employment cases are usually factually complicated and they may also be legally complicated, meaning that they are expensive to litigate. Employers recognize that it is difficult to defend employment cases for under six figures. Further, many statutory claims provide for recovery of attorneys' fees to a prevailing employee. While there are situations where an employee may have to pay a prevailing employer his attorneys' fees, those are less common. Most employers recognize this dynamic and approach a separation negotiation with some notion of an acceptable risk of incurring defense fees to defend an unmeritorious claim. That also means employers are much more inclined to settle meritorious claims before incurring litigation defense costs. Neither party is likely served in a separation negotiation by discussing the other's risk of future attorneys' fees because that just becomes an opportunity for both to posture. Nonetheless, the employer's risk of incurring legal fees through a lawsuit, and possibly paying the former employee's fees and costs as well, should loom large in the negotiation.
(Coming Next: What Separation Terms to Negotiate?)