Executive Compensation & Severance Counseling

A qui tam complaint filed under the False Claims Act typically remains under seal for at least a year, and oftentimes for two years or longer. During this period, the existence of the lawsuit and the identity of the whistleblower are both kept confidential. However, once a complaint is unsealed, the identity of the whistleblower is revealed. While courts have allowed whistleblowers to remain anonymous in limited circumstances, the identity of the whistleblower is revealed in the vast majority of False Claims Act cases.

A corporate executive who chooses to become a whistleblower can face apprehension and uncertainty about the future after their identity is eventually revealed. Although the False Claims Act and Sarbanes Oxley both contain anti-retaliation provisions, the reality is that many corporate whistleblowers no longer feel comfortable in a workplace environment where they are perceived as disloyal to the company.

If you decide to separate from your company, you must preserve the ability to negotiate a favorable severance package. This is especially important if you do not have a solid employment agreement. Severance agreements are binding contracts that are intended to settle all past and future disputes between you and your company. When evaluating a severance offer or negotiating a severance agreement, there are a number of important legal and economic issues to consider. We have helped our clients evaluate anti-retaliation claims and, in appropriate cases, negotiated favorable severance packages. By carefully assessing the strengths and weaknesses of your specific situation, we will identify issues that can be used as leverage to achieve the best possible outcome.

An executive who has been terminated without “cause,” as that term is defined in the employment agreement, is in the best position to negotiate a favorable severance package. It is important to remember that the company’s offer of severance is just that – an offer subject to negotiation. There are several important considerations when evaluating a severance proposal. For example, many companies offer installment payments over time that essentially keep you on the company’s payroll. If an issue arises within the company for any reason, your payments could be interrupted. Depending on your particular situation, a lump sum payment may be preferable to avoid potential delays or disruptions in receiving payment.

If severance is paid in installments, the manner in which those payments are characterized could create additional issues. When payments are structured as a continuation of salary over a period of time, it is important to ensure that those payments will continue even upon death or disability. Severance agreements can include other enforceable provisions that could limit or reduce the amount of salary and benefits you receive, including:

Mitigation – payments will end if you begin employment with a new company during the period specified in the severance agreement.

Clawback – any violation of a provision in the severance agreement could entitle your former company to repayment of all severance, as well as reimbursement of payments for health insurance premiums. Notably, a company can designate itself as the sole arbiter of what constitutes a violation of the severance agreement.

Non-Competition – you could be prohibited from working for a competitor during a specified period, typically one year. This restriction can present a significant hardship, particularly if you have specialized knowledge or skill in a specific industry. A company can also require that you allow them to contact potential future employers to ensure they are aware of the restrictions on your employment.

Non-Solicitation – severance agreements often include a provision that prevents you from soliciting employees or customers from your former company. This prohibition is usually enforced by means of a “cease and desist” letter sent from your former company to your new employer threatening legal action for allowing you to violate your severance agreement.

Unpaid Monies – your company may attempt to exclude certain items from severance such as unpaid bonuses and expense reimbursements. Any outstanding payments owed by your former company should be explicitly identified in the severance agreement. If a bonus has already been earned, or unreimbursed business expenses have not been paid, they should not be included as part of severance. A severance agreement should also account for any accrued vacation pay or paid time off.

Medical Benefits – a severance agreement can provide that the company pay COBRA premiums for a specified period. Since employer-paid medical coverage may be taxable to a former employee, it could be preferable to negotiate a taxable lump sum payment equal to the cost of the medical coverage. The continuation of other items, such as disability or death benefits, can also be negotiated as part of a severance package.

Consulting Services – in certain cases, a company might want to avail itself of your expertise and institutional knowledge. A properly structured consulting agreement can be mutually beneficial to both parties. Although such an agreement can involve additional, and often unrelated issues, it can nonetheless serve as leverage to negotiate a more favorable severance package.

A severance offer must be carefully evaluated, not only in monetary terms, but on the potential impact to your life, which could be significant and last for years. It is important to remember that no deal is usually better than a bad deal. If a company is unwilling to compromise and bargain in good faith, it is often better to walk away.

By declining a severance offer encumbered with prohibitions and restrictions, the number of employment opportunities available to you could be greatly expanded. Once established in a new position, any outstanding issues relating to your former employment, such as unpaid compensation, can be revisited from a more advantageous negotiating posture coupled with the availability of a full range of legal options.

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