Episode 25: Equity Compensation Plans & Severance Agreements

Speaker A: On it. Welcome to a brand new season of down the HR Rabbit Hole, brought to you by Crescent and Impact hr. I'm your host, Rachelle. Today, down the HR Rabbit Hole navigates the ever evolving landscape of human resources. Join us each month as we delve into the latest trends, insights and strategies share shaping the future of work. Whether you're an HR professional business leader or simply curious about the dynamics of the modern workplace, our expert guests and thought provoking discussions will empower you to thrive in the world of hr. Now, we did take a little hiatus, but we're back and we're better than ever with amazing guests and exciting topics that you'll want to stick around all season. For today I have two members of our Impact team joining us. Impact. For you those of don't know, impact, our HR consulting division of Crescent, helping our clients navigate the crazy world of hr. First, we have our compliance guru. By day, you can find him helping our clients stay on top of those compliance challenges that can lead them in hot water. But on the weekends, you can find him participating in extreme donut eating contests across the country. Welcome, Alex. Number one.

Speaker B: Thank you.

Speaker A: Next to him, he helps clients manage and fine tune their, their talent management strategies. But his secret passion is teaching penguins to surf. Hey, Connor.

Speaker C: Thank you. You hit the nail on the head.

Speaker A: Today we have our special guest, Alex Glaser. Is it Glazer or Glaser?

Speaker D: Glazer.

Speaker A: Glazer. Okay. From Jones Walker. Hey, Alex.

Speaker D: Hi.

Speaker A: Can you tell us a little bit about yourself?

Speaker D: I wish I did. Donut eating contests or surfing penguins.

Speaker B: Uh, me too.

Speaker D: Nothing that exciting, uh, about myself. I am a partner at Jones Walker. Uh, deal with a lot of labor and employment issues with a specialty in employee benefits and executive compensation. Um, so getting people paid, which is nice, um, sometimes getting people dismissed with fairly generous payments, like golden parachutes, which is nice, uh, if you're departing, but hard pill to swallow if you're the employer.

Speaker A: Absolutely.

Speaker D: And, uh, so, yeah, it's like, like you guys know, it's always, uh, evolving compliance. Always, uh, evolving compliance landscape. And, uh, most of the time we're able to, uh, most of the time I think our clients are happy for our advice. Even if it is a difficult, uh, pill to swallow in some circumstances when it comes to severance or golden parachutes or termination. Ugly termination.

Speaker A: There you go. Well, we welcome you and thank you for being here today with us. Of course.

Speaker D: Thanks for having me.

Speaker A: Absolutely. So we could probably spend hours on a variety of topics with you with your wealth of knowledge and Experience. But we really want to focus on two things today that we see frequently come up with some of our clients, and that's compensation and separation. Um, so what are some of the common challenges that employers face when designing and administering equity compensation plans?

Speaker D: Yeah, so, um, equity compensation plans. So that's basically when you want to incentivize, uh, your workforce by giving them a piece of the pie. Right? You're basically slicing off an ownership stake in your company and saying, look, instead of paying you cash, I'm going to pay you in the form of equity ownership in the company. Um, it can be great or it can be a complete nightmare. It can be great because the interests of the company are then aligned with the employee. Right? Everyone's rowing in the same direction at the same speed and working towards whether it's an exit event or growing the company. Um, it really can be a powerful incentive tool. It can also be kind of a nightmare because this person is now your partner. Right? You founded this company. You go out and hire a key executive. You give the man or woman 2%, 5%, 10% equity stake in the company. They now have voting rights. They now have a right to inspect all of your books and records. They have a right to come to all your meetings, and, and they have a right to share in distributions, um, unless you structure that equity grant in a way that is more workable for you. Right? So, um, that's kind of a good, kind of overview of what you asked about, which are, what are some of the kind of main concerns and potential pitfalls when designing these equity compensation schemes? Um, really the big thing is this person is now an owner. You have to realize that. But what limitations on that ownership do you want to put in place? For example, if the company hits it out of the park and you get a huge, you know, a huge monetary distribution as the owner, like you should, should that person still get the same type of distribution? Should they share in those same level of profits? Should they get 50% of the profits? Should they get more of the profits? Because, um, they really were a key part of hitting it out of the park that year. Right? Do you really want that person voting, or do you want to put some sort of limitation on their voting rights? Um, do you really want that person inspecting the books and records of the company? In a lot of cases, you really can't help it because under state law, they're going to have a right to do that anyway. So there's all these kind of moving parts you want to think about. Um, when granting Equity.

Speaker A: So how do you limit that?

Speaker D: Um, some things can be limited, some can't. Oftentimes it's an issue of creating a second class of stock that's a compensatory class of stock. And oftentimes instead of doing that, it's really easier to, um. Nowadays, what seems to be in vogue is to grant what's commonly referred to as phantom equity or synthetic equity.

Speaker B: Can you go in, uh, on the phantom equity?

Speaker D: Yeah, it sounds super. Kind of sounds nebulous, eerie, complicated. Uh, it's really not. Um, so the whole concept of this, and it's been around a long time, but we've been seeing it more and more. And as we introduce it to clients, um, more and more people have heard of it. More and more people actually like the idea. This is really how it works. And you'll see why it's called Fantom or synthetic equity, fake equity, whatever you want to call it in a second. Um, you basically, instead of saying, look, um, Suzy Q, you're my new CEO, I want to give you 5% equity stake in the company. We all know that equity stake, like I said, comes with dividend rights, voting rights, rights to inspect the books and records. That person is now your partner. In a phantom or synthetic equity scheme, you give that person a monetary equivalent of, say, that same 5%, but it's not real equity. So they have a right to the economic benefits of that 5% ownership stake. So if you get a distribution as an owner, that person always gets it also gets a distribution as if they are a 5% owner. If you have a sale, you know, if you sell the company and you make X dollars on the sale, then that person gets a piece of the pie as if they are a 5% owner. But they don't get to vote. You, you can limit their dividends or distribution rights if you want to. They don't get to inspect your books and records. They don't get to come to meetings. So you can see why it's called phantom equity. It's as if they have the, you know, it's as if they were a 5% owner in our hypothetical, but they really just have the economic rights associated with it and none of the shareholder or equity rights. Um, so it's a pretty cool concept. And again, we see a lot of this, um, you know, especially in, um, in growth companies, when they're kind of these early stage companies are formulating their capitalization tables and they're deciding, okay, we need to slice off X amount for, um, an option pool, an employee Stock option pool and Y amount for potential investors that come in and X amount for management. There's not a lot to go around for new hires, right, or your key executives that you want to bring in. So one way to entice them is really to say, look, we're all working towards an exit event in three to five years instead of this actual equity, which we don't have a lot of, and each time we grant it, it dilutes everyone else. Right? Why don't we give you this synthetic equity so that when we have a sale event, you get that 3% or 5% or 1% or whatever it is right off the top. So it's basically like a sale bonus. As if you were an owner but you're not a true owner.

Speaker A: And that's something that somebody would, a new uh, business would come to you or come to Jones Walker and say, hey, you know, we want to have, you know, give these things to our key employees. And you guys would come up with that plan and be able to execute.

Speaker D: So it's not like a 401 plan where you go buy it off the shelf from, you know, from a fidelity or something like that. These things are all pretty individually negotiated. So there's no um, m. There's nothing kind of off the shelf when it comes to these phantom or synthetic equity, um, schemes. A related topic of, you know, a related flavor of that is a profits interest, um, scheme. You guys may have heard of that. It's really, um, it's really kind of a twist on the kind of phantom equity, ah, phantom equity, uh, uh, concept. Um, but yeah, it's not a, you know, it's not something you, you can kind of go buy.

Speaker A: Um, it's not like. Check this box.

Speaker D: This is what you're saying? Yes, exactly. Um, it's cool in the sense that it's not governed by the tax code or erisa. Uh, there's no requirements. It's a pure contractual Right. It's really no different than an employment agreement. Right. It's just a right to share in compensation at a later date.

Speaker A: Got it.

Speaker C: What would be the benefit for an employer to, to offer a phantom equity plan versus just a straight up bonus or a pay wage increase? Are there some kind of financial or tax benefit?

Speaker D: Um, so there's a benefit to the. Yeah, it's a great question. Um, they're similar, but the benefit is, you know, in a bonus plan, if the bonus. Usually a lot of times those bonus plans are either annual plans or they're based on some sort of performance metric. And it's really, you're promising a set amount of the bonus. So oftentimes it's a percentage of base compensation or it's based on a company, uh, wide performance metric. Like if we have X amount of profits, you get this amount with the phantom equity, it's always based on a percentage of ownership of the company. So the person feels like they're an owner in the phantom equity arrangement, even though they're not. Whereas in a bonus plan, you still feel more like an employee. Right. You get 10% of your base compensation. Or if we hit the $1 million mark, you get to share in 5% of the excess profits of that. Um, so it's really just the, I guess to answer your question directly, it's really just what the metric is. Based on the payment metric.

Speaker A: Would you consider that the phantom equity really a trend that's going on?

Speaker D: Yes, definitely. Um, I mean, when I first started practicing, you'd see it occasionally nowadays, especially with early stage companies, they really like this idea. And it's great because like I said, you're not really having to give away equity and you're really. A lot of times it's only really paid out upon a liquidity event. Right? So if there's a sale of the company, that's when it's paid out. So you really don't have any cash flow issues like you would with an annual bonus plan or even a performance bonus plan where you do have that lingering deferred obligation to pay. Um, and you may or may not really, you don't know what your cash flow issue is going to be like in the future with that phantom equity plan that solely pays out upon a liquidity event. You know, the cash is going to be there because you just had a liquidity event.

Speaker A: So what about on the flip side? I'm thinking of it as like an employee. If the business goes under and they're this, they have phantom equity in the this company, does it make any difference? Are they on the hook for anything or is it. No. Nope. Okay.

Speaker D: Nope.

Speaker C: If the employee that offered this phantom equity, if they were to leave the company, uh, would it be part of any final paycheck or any type of payout that would be owed to the separating employee if they had private equity in their employment agreement or however? Um, I know in normal ownership, you would take that equity with you. So phantom equity you would not take with you if you were.

Speaker D: No, you would. I mean, you could have, you know, and again, this goes back to the fact that all these you know, synthetic or phantom equity agreements are all individually negotiated. That would be a negotiation point. So sometimes there is some sort of payout based on the current value of the stock of the company. Um, sometimes it just completely goes away.

Speaker C: Nice.

Speaker B: This may be something. I mean I'll likely have a client. I'll have to refer your way on this because we're ah, talking about kind of just that what they're looking at is in a sense this phantom equity. But it would be more of a retainer tool for or even an attraction for key executives. So long term management making them stay or enticing uh, key executives to come on board. So I guess one of the things, uh, as part of what I'd be curious about and maybe cassette, I may have to pay you for this information. Uh, how do companies kind of assess that value? How do they get an idea as far as. Well this is what uh, you know, your percentage of stock would look like. Is it all just kind of based on, you know, the company worth at a time or are there other assessments of value towards it?

Speaker D: Yeah, you're asking in the phantom equity world or real equity in the phantom equity world? It really just depends. Um, you know a lot of it is um, kind of negotiated either at the board level or at the founder level if they don't really have an active board yet. And it really just depends on. Well, how much of the pie do you really want to give away when there's a liquidity event. Right? Because think about it, I mean that comes straight off the top. If you sell for a multiple of whatever it is, it's really, you're not, the rest of the owners are not getting that part of it because it's sliced right off the top and given to, to the executives in a phantom equity arrangement. So normally uh, I never see them above like 10%. Usually it's like 5% or less. Um, and oftentimes it's like a phantom equity pool where it's 5% and then you know, the company can divvy it up like you know, um, you know, uh, 1% to so and so and then you know, half a percentage to the next higher.

Speaker A: Do you feel like from you know, the incoming market, the Gen Z employees, they feel uh, like uh, you hear it a lot and I'm sure you guys hear it too. Whereas they don't necessarily care so much about their salary or these things, but they want these perks or they want to be heard and they want to be like seen. So this is almost a way of hey, compensating them and like appeasing their egos in a sense, if you will.

Speaker D: I would agree with that statement. And uh, you know, it, uh, it's always difficult to explain to the employees because I think from the employee perspective they're always used to not only the perks like you're saying, but they're used to more traditional. Everyone has heard of a stock option, right?

Speaker C: Mhm.

Speaker D: Everyone's heard of a restricted stock grant. Not everyone's heard of phantom or synthetic equity. So it's harder to explain to employees. But the reason they like it, especially as opposed to something like a restricted stock stock grant is remember once restricted stock vest, you have to pay tax on it. And a lot of times it's, you know, if that restricted stock is not publicly traded, you have to come out of pocket because that's phantom taxable income to you. Right. Employees don't realize that and then they're stuck with this huge tax bill. Whereas the phantom equity arrangement, you don't owe tax until it's actually paid out

Speaker A: and then you have that money.

Speaker D: So it's really. Once you explain to the employees, it's actually a lot more attractive.

Speaker A: Yeah, very nice. Uh, yeah, go ahead.

Speaker B: I was going to say, do you see this? I mean reaching back in the beginning it was kind of just something talked about. Now it's more of a trend. Do you think eventually this will be the go to option? This will be the first thing that a lot of your clients will push for in the beginning as opposed to typical stock options?

Speaker D: Um, I think it just depends on preference. Um, it just depends on every company's different. The more mature companies, um, that aren't really working towards a liquidity event, they're not going to, you know, they would rather just give equity even if it's dilutive. It just, like I said, it just all depends. And if you're publicly traded, you know, it's, you know, real, um, equity is not really an issue for you. Right. There's tons of it, so it doesn't matter. So it all just depends on the client.

Speaker B: Gotcha.

Speaker A: So when companies are looking at their compensation plans, just overall, what are the common pitfalls to avoid when implementing either new plans or updating their current ones just to come up to market standards? And how can employers address those?

Speaker D: Yeah, um, from the non legal perspective, it's really find something that's workable for you. I mean I can't tell you how many times someone comes in and says I want to do restricted stock plan, but they don't realize, like I'm saying, like I said before, when that restricted stock vest, that employee has a, has a taxable event, um, and then that employee's going to come to the company and ask for a promissory note to pay their taxes. You know, I mean, a lot of times they just don't think. They just hear about something say, well, that's what I want to do. Um, we have this nifty chart, you know, that I always send to people that say I want to do X that just kind of makes a comparison between, well, what type of award do you want? Real equity or fake equity, synthetic equity. And then do you want to a full value award or do you want an appreciation award? And that's something to think through too. Um, the full value award is obviously, you know, and the easiest example is, well, I'm just giving you stock. You get the full value of that stock from day one, right. Your full equity owner. The comparison to that would be an appreciation award. That's something like a stock option or restricted, um, or profits interest grant, um, or um, stock appreciation. Right. What that is, is it's different. You have an option to exercise to receive stock, but it doesn't really hit. It's not really in the money until there's some appreciation in the company's value. Right. So really think through. Do you really want to give away a full value award on day one, or do you really want to incentivize someone with a, an appreciation type award that's really only or something as the company grows? Um, I think people don't think through that enough because again, they just hear, well, I had X, you know, I had this type of arrangement in my old company. So that's what I want to do when I start my own company or that's what I want to do here. Um, and I think just think through all the implications, including the tax implications. Right?

Speaker A: Yeah. So for Alex number one and Connor, when you guys are talking to clients and you guys are talking about compensation strategies, what do you hear from clients and what are kind of their, I guess their challenges and trying to come

Speaker B: up with something, uh, for me first also I was Alex number two before we started.

Speaker A: Sorry, I introduced you first and now you're one.

Speaker B: I appreciate it, I appreciate it. I mean the biggest thing, and maybe this is some where the conversation will go that I find with a lot of my clients besides the client I just mentioned where they're looking into just that, that phantom. I think, uh, the term we were using was ghost Stock, but same thing, I imagine. Uh, the number one thing I find with a lot of my clients is they don't know where to start as far as setting up any kind of compensation structure. Uh, and we have larger clients as well, multi state that have. They kind of do it ad hoc. And it worries me because they'll make a hire. Uh, you know, higher A gets this much money, but higher B gets this much. And there's a lot of disparity and not much, uh, like, reason behind it. And it seems like a huge risk factor as far as where discrimination might come into play for employee. So for a lot of my clients, what would be, I guess, where's a good starting point when setting up a compensation structure, even if it is just at your executive level? You're building out your leadership team. Um, you know, you want to define what their compensation would look like and making sure you're not going to have an event where this is one of my clients, uh, right now they have an employee who's been there, I think, almost the entire length of it. I know this is going on. Give me one second.

Speaker C: Oh, you're good.

Speaker B: He's been there the entire length of it, and he is almost making the same amount as his manager. And the manager is not aware of it that I know of, that ownership knows of, knock on wood. But, uh, he's within, I think, two to three hundred dollars from making the same amount of his manager. And come the next raise, he'll probably be at his manager's rate. Whereas the manager's compensation, they base it more on overall performance of company before he sees his raise. M. So it's a lot harder. Whereas the employee, they're just giving him annual increase after annual increase.

Speaker D: Yeah, it's always that old saw. Are you going to base compensation based on seniority or performance? Right. Um. I mean, I know it's always an issue. Look, it's an issue at our law firm. Some of the younger people are making more than the older people. All the partners get to see what we all make and we get to vote on it, which is interesting. Um, but it's all based on performance. Right? I mean, that's how we incentivize our partners and our associates, our lawyers. It's purely based on performance and not on seniority. Um, other people value seniority, um, and loyalty with the company and years with the company more than performance. It's really just, um, it's really just a preference. Right. Um, I think like you're saying, it seems like they have one or two or whatever, it can always get out of whack. And that's when you kind of, you know, it's up to management to come in and say, well, this really is out of whack. Um, you know, this is not consistent with our compensation principles and our compensation scheme and we need to do something.

Speaker A: Are there any type of like, I guess, legal ramifications that would happen? So, like, I have a friend and she was starting to look for a new job because she figured out that a younger, greener person came in and was making more money than her and she's expected to down train this person and she's like, this makes no sense, but they're offering this person more money because they can't hire and fill the position otherwise. And so she went to her HR and she's like, I don't understand what is this? Like I've proven myself and I'm still, still like not even on par with this pay scale. And so now she left. She ended up leaving and getting a job within a company in a different division to make more money. So is there ramifications, like legally for companies that do this because they're using it as an attraction tool because they can't hire otherwise?

Speaker D: Yeah, not unless they're doing it in a discriminatory manner. Right. Um, otherwise, that's just what the market will bear. I mean, nowadays we're in a high hyperinflationary environment and we see that with wages especially. Right. So oftentimes that is going to happen. Now, as you all are aware, if that, you know, that pay disparity is based on some sort of protected characteristic, especially gender, then, uh, you're in trouble.

Speaker B: Do you have to, uh, I guess is the burden of proof on, if that's the appropriate term, um, on the business to show that they weren't being

Speaker D: discriminatory or in a lawsuit? Uh, I guess, um, in a litigation context, yes, but in just a normal business context, I guess you're not really dealing with a, uh, burden of proof yet because there's no litigation. But certainly if you're going to look at it from any type of, you know, through any type of legal lens, I think you are going to want to go through and think about it. Well, if we did have to, you know, if we did have to prove this in court, uh, how would this look?

Speaker B: You know, I guess that's just the angle come from. You know, if you're using an attraction tool in your eyes, there's nothing wrong, like I need to fill this position yeah. But then, you know, her friend, the employee comes by that's kind of getting spurned by this said, well, you know, in her case, female, I feel like I'm being discriminated against. How's the business kind of set itself up to be in a position? It's like, no, like, this is what the market demands for this role.

Speaker D: Sure. And that would be your affirmative defense. Right? Is okay. Like, look at how hard it is to hire people. Look at people jumping jobs that are getting 5%, 7%, 10% raises. I mean, you would raise that as an affirmative defense at court. Right. And say that's just the free market right now. That's the compensation market.

Speaker C: Um, well, if we're done with that one. Uh, for me, my clients, what I see a lot is a lack of complexity with the compensation plan. So, of course, there's pay, and then there's medical benefits, and there's retirement plan. Just your standard 401k, maybe a, uh, 457B or whatever it may be. But that seems to be the extent of what most of our clients are offering. So if I were to flip that into a question for you. If for these clients, who were mostly 10 to 50 employees, if they were to add complexity to their compensation plans to what your expertise is like with these equity options, what would you propose as a next first step to consider adding to their compensation plan?

Speaker D: Uh, yeah, it's a good question. Um, I mean, it just depends on what the type of company, you know, and where they're geographically located. I mean, you know, in California, everyone wants this, like, you know, unlimited PTO scheme. You can just like, uh, work when you want to and not work and work from home or work from Mars or. Dude, you know, it's work from wherever.

Speaker C: Right.

Speaker D: I mean, that seems to be one of those new things that, uh, you know, seems to be in trend. We'll see how long that lasts. Um, you know, so. And a lot of these young, you know, emerging growth companies, that's. That's what's in now. A lot of the more mature companies, it's different, right? I mean, they want you there, they want you in the office, or they want you, you know, at headquarters, but they're offering just different types of things, especially from a wellness plan perspective. Um, you know, one client that does, uh, they offer CrossFit, like, every day at lunch, like in, you know, know. And I mean, they have like a warehouse. I know, I'm like. But they have like a. And then, I mean, this is an impressive, you know, they're impressive. I mean, they've CrossFit classes and a full pharmacy on campus. I mean, you know, they go. But I mean, you know, there's all kinds of things you can think about. Just be creative and. Yeah, just be creative and think outside the box. Um, you know, a little bit will go a long way, especially when it comes to, you know, a lot of these health and wellness types of perks.

Speaker B: I think we can argue for the, uh, gym and the quiet rooms again at that point. That's been a big push for us on this side.

Speaker A: I want to move on to severance. Make, um, sure that we hit that. When is it the most appropriate to offer a severance agreement to an employee?

Speaker D: Yeah, um, I guess in two circumstances. One, if you have a, um, legally binding obligation to do that. So, for example, if the employment agreement says, okay, this person has severance, then, okay, you need to get a waiver and release before you pay that severance. Please don't ever pay severance without getting a waiver and release. Hopefully you've reserved your right to get one in the employment agreement or in whatever severance plan you put together. So always, um, get a severance agreement if you have a legal obligation to pay severance. This is just a tip of the trade. Sometimes you forget to put in there. Okay, you get severance. Um, but I didn't reserve my right to get a waiver and release from you. That means you can pay that person something that they're not otherwise owed, compensation wise, but they can come back and sue you. Right. Really bad. So always reserve your right to get a wave full waiver and release of claims in whatever severance plan or employment agreement or whatever you're putting together. Um, sometimes you can kind of go back and fix that. But truly, legally, the employee doesn't have to sign that waiver and release if you've otherwise promised severance and you haven't reserved your right to do that. So that's the first thing. If you have legally binding right to pay severance, get a severance agreement. Second, um, I would say the second circumstance where you always want to get one is if it is a sticky, um, termination, um, you all have obviously been through a lot of those types of circumstances.

Speaker B: I got one recently for you.

Speaker D: So if it's a termination that is likely to give rise to liability, either from a, you know, Title VII perspective, Fair Labor Standards act perspective, ERISA perspective, whatever it is, whatever law, um, you know, could be implicated, it's certainly best to make an offer of severance and get a waiver and release of claims in that circumstance, that waiver and release,

Speaker C: is that essentially just a disclaimer saying that once you receive this severance, this is the end?

Speaker D: That's the end. You can't sue me.

Speaker C: Is there a certain way that you have to word those? Not, uh, give out free information.

Speaker A: They're not just googling, they're not pay

Speaker B: Alex by the hour.

Speaker C: Yeah, that's right.

Speaker D: No, I mean, uh, a lot of them, you know, nowadays each lawyer has their own template for, you know, I have my template and you know, some of my partners, it's all pretty similar. Um, but yes, there are some things that are in there that must be in there and must be disclosed in order for that waiver and release to be valid. So the worst case scenario is you pay out severance, which you probably didn't want to do anyway because getting rid of this bad employee and they're threatening to sue. Or they might have some sort of claim paying out severance which the employer doesn't want to do anyway, and you give them a waiver and release. And the waiver and release doesn't necessarily comply with what all these hosts of laws say it has to comply with. So an easy example is if the person is over 40 and you want to get a waiver under the Age Discrimination and Employment act so that they can't come back and sue you for age discrimination, you have to make certain disclosures in the waiver and release document. The document doesn't have that. The whole document could be invalidated.

Speaker C: Wow.

Speaker D: And they could come back and see you even though you paid them severance.

Speaker C: Wow.

Speaker D: Nuclear option. Worst case scenario, um, if, you know, nowadays there's a lot of disclosures related to the Defend Trade Secrets Act. There was a new law, um, there was some new guidance under, um, Dodd Frank dealing with some disclosures, uh, that have to be made. The NLRB had some disclosures a couple years ago regarding non disparagement and severance agreements for non managerial employees. So yes, uh, to answer your question, yes, there are a, uh, host of disclosures that must be made legally which if you don't make, which if you don't make them correctly, could give the employee a right to come back and sue you even though you paid them severance.

Speaker B: When you, uh, not good. When you say in the situations like Title 7 or maybe discrimination against a protected class, is there any like, certain level of risk? Is it any termination that would cross into those boundaries that you feel, all right, severance is appropriate and the situation I can give you this has actually happened quite a few times throughout my career, which is a little odd now that I think about it. But, uh, executive retaliates against an employee. Uh, I mean, it's clear cause for termination. It violates the handbook. Uh, the company, whether it was a client or employer that I worked for, part of the HR team, they move that we're not going to offer severance. Uh, now, in these cases, executives say under some foreign protected class, uh, they feel comfortable where, you know, there's no, no way they'll sue us because we have clear cause for termination with this retaliation case that we've investigated. Therefore, we're comfortable. We're not doing it. You're fired. There's the door. Would you think then, or if I'm understanding you correctly, if you're going to start to cross into those territories of possible discrimination, no matter what it may be, you're better off getting a severance package put together with that waiver and disclaimer.

Speaker D: Yeah, um, it's a good question. It's just each circumstance is different. Each employer's risk tolerance is different. Obviously, if you have a white dude under 40, the risk of a Title VII claim should be fairly large, pretty small. Um, but you never know. Um, so, you know, it's always different. Right. Um, you know, obviously some things, like you're saying, Alex, are going to be driven by. Well, what protected classes does this individual fall into? Also going to be driven by the circumstances surrounding their termination. Right. Were they retaliated against? Were they a bad performer? If they were a bad performer, do you have, you know, performance documents that support the poor performance leading determination? Have they hired an attorney or have they been talking to an attorney? Have they sent communications over to the HR director? Um, you know, have they sent demand letters? Did they call HR and say, well, you know, you know, uh, and say the magic word like, you know, I'm being discriminated against? I mean, all these facts and circumstances really lead to some sort of determination of what the true liability is here. And you can figure it out. Once you've seen the permutation a few times, and you guys have certainly seen it more than a few times, you can kind of figure out which ones are really a risky termination and which ones are not. Um, and that also drives the amount of severance. Um, you're going to want to make the severance offer. If you truly want to be able to sleep at night, you want to make the severance offer generous enough where the employee is going to sign it. Right. And not bring it to a lawyer. So, you know, two weeks severance versus two month severance versus six months severance. It's a big difference there. Um, in terms of the employee, you know, you want to make it sweet enough. Especially in circumstances where it's a sticky termination that the employee just signs it, preferably on the spot, returns it the same day, you wait your revocation period and all is good in the world. Um, that's the preference.

Speaker B: Well, I guess on the opposite of the, uh, the best case scenario. What's worst case scenario? I mean. Well, I guess it would be that nuclear. Uh, as far as.

Speaker D: Yeah, I would say that's a, that's a really bad scenario. Um, another bad scenario is, um, is, you know, a lot of times, and everyone has different thoughts on this is the severance offer. By making it, are you actually putting in the employee's head that they might have a claim? Right. Um, and so you're always debating if you're going to pay some nominal amount of severance, two weeks, four weeks, does that even making the severance offer, does it give the employee a thought? Wait, now that I read this, maybe I am part of a protection, protected class. Maybe I do have a claim, you know, and there's always different thoughts on that and different preferences on that. That's always a kind of a worst case scenario where you're like, pay this person severance and they come back and go hire a lawyer.

Speaker A: So I mean, I've never even thought about it that way. But like in people's minds, maybe you guys can speak to this. Like I've gotten severance before. When I was working for a pharmaceutical company, the big one ate the little one and then they terminated everybody. So they gave us all severance. And so it never thought, it never crossed my mind, like it was something that was wrong or to do. But when would it be, I guess in a wrong situation to offer severance because it raises these kinds of flags on the employee side? Or is there a time that's wrong because it would raise flags?

Speaker D: Yeah, it's a good question. It's always, it's just individual facts and circumstances. Right? How big is the potential liability? And a lot of times, you know, ask the clients, I mean, tell them like, you guys know this employee, you know this individual, you know this person, how are they going to react? I mean, think about it. I don't know this person. Right? You're telling me all these facts, you're telling me they're protected. You know what Protected classes. They're part of what severance amount you're willing to pay them? I don't know this employee, I've never talked to them. You have to ask the HR person or whoever is dealing with the termination, how do you think this person would act? And you have to make your best educated guess. And that could be different for you, each person. But I think we as lawyers get so wrapped up in like, you know, the legalese of all these things that we forget that these are real world situations. I mean that's where you guys come in, you know, it's like, well, you know, that's why you all are so valuable, because you bring the human experience towards it, not just the legal and compliance experience where, you know, it's. Each person's going to react differently to getting a severance offer.

Speaker A: Right, Right. So this can be a case by case. It doesn't have to be like, you know, you're offering something to somebody and not to somebody else. It can be a case by case scenario.

Speaker D: That's correct.

Speaker C: What are some of the worst results or the worst things that can happen as a result of a improperly written, um, severance agreement?

Speaker D: Yeah, um, the whole thing can mean validated by a court so they could throw the whole thing out.

Speaker B: Have you ever seen that happen? As far as client gets, uh, a severance agreement off of Professor Google?

Speaker D: Um, I've never seen it. Um, there are reported cases where the entire severance has been deemed invalid or there are reported cases where they say, well, part of it's valid, but part of it that wasn't necessarily compliant is not valid. So that employee may not have a right to sue under, you know, um, they may not have a right to sue for X, but they would have a right to sue for, for um, under the Age Discrimination act because you didn't make those required disclosures. Or they would have a right to certain, um, they would have other legal rights because you didn't make the defend Trade Secrets act disclosure or something like that. That's the more common scenario. Nice.

Speaker B: Well, time to get back to our clients and maybe not sound alarms, but um, I do have a client that severances for like every employee and I sometimes caution them against it. I was like, please.

Speaker D: Yeah, it's, it's uh, and, and people get in that mode because it's like they're so used to doing that and it's really, people forget if you don't have a severance pay plan that obligates you to do it, you don't have to offer severance to everyone.

Speaker B: And uh, I think for them it's a lot of fear.

Speaker D: Yeah.

Speaker B: Like you said, maybe it's. I mean Louisiana's a Sioux happy state. Uh, maybe a little bit more on the driving side. Connor got to experience that.

Speaker C: I sure did. Right after I got employed. Got rear ended on the interstate.

Speaker D: Yeah.

Speaker C: I needed a car and I didn't get hurt. So it worked out.

Speaker B: He's not used to our ways over here but uh, I think they're so afraid a few clients, they're so afraid of just this employee is going to sue me that their first mindset is even um. You know for one. One client of mine is like a property maintenance technician uh, with stealing time. I mean very just clear cost for termination. They were like, well should we offer some offer him severance because we really don't want him to sue us. It's like, well, I mean you're firing him for cause.

Speaker C: Yeah.

Speaker D: I mean you just have to get in the mindset of look, anybody can sue for anything at any time.

Speaker B: Absolutely.

Speaker D: Especially in Louisiana and that.

Speaker A: And I think that why what these guys do is so powerful because it's, you know, it was clear cause. So if you have that documentation goes to court, you're like, sorry, you're out of luck. You know, you work with, you know, your lawyers have the proper things in place on that side.

Speaker D: Yeah.

Speaker A: And then the documentation from an HR perspective, it's like you're putting together a clear case.

Speaker D: Yeah.

Speaker A: To protect the employer.

Speaker D: I think employers forget that a lot. I mean and you know, always remind them of this. If it's a really clear cut for cause termination that's well documented. That person has to find a lawyer to represent them. Right now there are a lot of, you know, lazy. Yeah. Lawyers out there but ah. That will represent anybody. But remember they're going to have to actually, you know, look at the totality of the circumstances here.

Speaker B: I love that term.

Speaker D: Prove it and prove up a case. Right. I mean if you have a mountain of pips on somebody, you know it's going to be hard for that lawyer to make any sort of meaningful recovery on that client.

Speaker B: I know we're uh, ending the getting close to the end of our time but really uh, appreciate and to hear I mean how many clients gone around by you. But we preach like you should memorialize everything like every single document. But we have so many clients and ironically enough probably the same clients that are quick to give severance to anybody where they just don't want to do it. They don't want to do the documentation process. They want to fire as fast as possible. And then they sit there and they're like, well, God, what if they sue us? Let's offer them severance. And it seems more willing to pay, you know, one month, two weeks, two months, whatever it may be, of pay for severance, as opposed to just typing up a word document, following up, making sure that pips are, uh, being maintained in some file, secure file. So I guess from your experience working with companies, do you ever find them in that situation where they're having to pay out severance because they've so poorly documented, uh, an employee's performance issues that even if they have cause, they're in tough luck on showing it?

Speaker D: Yeah. I mean, you're only as good as your written documentation. Right? So if it's not written down, can we clip that? Yeah. Right. I mean, you all know in the HR world, if it's not written down somewhere, it just doesn't exist. Yeah, didn't happen. It's he said, she said.

Speaker B: So, um, that's the beauty of having Philip as a boss. Philip so bad at technology sometimes. I don't think he's typing up on our performance review.

Speaker D: He's not typing up your pip.

Speaker B: Yeah, he's not typing up our performance reviews. I should say so. As far as Philip's concerned. Yep, we're perfect. I mean, how many times I've heard him say, uh, I don't think my keyboard works like, oh, thank the Lord.

Speaker C: Yeah, technology issues today.

Speaker B: Yeah, he did. Uh, internal HR fixed his technology today.

Speaker C: That's right.

Speaker A: My God. Well, we want to thank you so much, Alex, for joining us. It was a great conversation. Um, guys, any final thoughts?

Speaker C: I thought it was a great discussion, and I wish we had more time because we had a lot more we could definitely talk about.

Speaker D: Yeah, great.

Speaker C: Well, have me back.

Speaker D: We'll talk more.

Speaker B: Absolutely, absolutely. Well, I have to get your business card as well.

Speaker A: And we'll join. Join us again next time for another episode of down the HR Rabbit Hole.