How safe is a severance offer?

M

momoney

Recycles dryer sheets
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Not sure if this is the best place to post, but severance would be used for FIRE money.

I was offered severance with the option to defer until next year. That sounds like a good idea for taxes. I'm worried though because the company is in financial turmoil. If things keep getting even worse, could the company deny paying the severance next year?

I know severance is not guaranteed in most states. If they offer you a payment in exchange for signing away any claims against them, is that a binding agreement? Perhaps none of this matters if they file bankruptcy?

Would you just take the money and run?
 
I'm assuming your severance will be 5 figures.

Door #2 - defer, but ask that they give you a guarantee that the money will be there in 2024. This is a negotiation. They don't want to part with the $ in 2023, so how will they guarantee $ in 2024?

Worst case: you can file a claim with the bankruptcy court for the amount of the severance. And it could take years, and you could be at the bottom of the list of claimants.

Or if you feel uncomfortable with the answer to Door #2, go for Door #1 and ask that they add the value of taxes they need to submit to state/federal governments to the payment to reduce your tax burden. It's a negotiation. They can say no, and so can you.
 
Caveat: I'm not an HR expert or anything close to that, but I have been a people manager for a couple decades, and I also have some direct professional experience of how corporate bankruptcy works (don't ask how, I can't tell you).

So, that said, if you think your employer could end up in bankruptcy anytime soon, take the $$$ asap and run. In bankruptcy court all bets are off, all agreements/contracts can be revoked, terminated, cancelled, revised, etc. it is the wild west where there is far more discretion granted to judges than a more conventional court.
 
And I'm gonna add, that in my years of observation, and having survived dozens of restructurings in my work life, if the ship is sinking fast, usually the first wave of severance offerings is the best. The terms get skimpier and skimpier with each successive wave of cuts. I suspect this is because the senior management and HR folks design the first one for themselves and get out while the gettin is good - have seen this play out a couple times.
 
momoney said:
Not sure if this is the best place to post, but severance would be used for FIRE money.

I was offered severance with the option to defer until next year. That sounds like a good idea for taxes. I'm worried though because the company is in financial turmoil. If things keep getting even worse, could the company deny paying the severance next year?

I know severance is not guaranteed in most states. If they offer you a payment in exchange for signing away any claims against them, is that a binding agreement? Perhaps none of this matters if they file bankruptcy?

Would you just take the money and run?
Click to expand...

Assuming no bankruptcy, consider the impact of social security taxes. Depending on your annual income you may end up paying more SS taxes by deferring
 
LateToFIRE said:
Caveat: I'm not an HR expert or anything close to that, but I have been a people manager for a couple decades, and I also have some direct professional experience of how corporate bankruptcy works (don't ask how, I can't tell you).

So, that said, if you think your employer could end up in bankruptcy anytime soon, take the $$$ asap and run. In bankruptcy court all bets are off, all agreements/contracts can be revoked, terminated, cancelled, revised, etc. it is the wild west where there is far more discretion granted to judges than a more conventional court.
Click to expand...

+1 If you think there is a significant chance of bankruptcy I would probably take the money now and let the taxes be what they need to be.

Even if the taxes are high for one year, remember that this is a once in a lifetime event. Excess taxes won't look so bad if (mentally) averaged over 10 or 20 years. Treat it as such and don't worry once you have the funds.

-gauss
 
Marko’s third law: "Take the money and run". It has served me well over the years.

If they're already shaky, don't worry about taxes. Take the cash and don't look back. "Bird in hand" and all that......

My severance was paid out over several years, but it was, and still is, a solid outfit.

With few exceptions, I believe one shouldn't let taxes drive financial decisions.
 
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Man, I just don't think I'd be taking any chance at all here. Options are take the sure money and sleep at night or hope for a few extra dollars and wake up every morning going straight for the news hoping to God you don't see disaster headlines.
 
RetiredAndLovingIt said:
I would take the money and run if they're in financial difficulty and there is even the slightest chance that they might file for BK.
Click to expand...
Yes. OP is almost certainly an unsecured creditor and powerless to negotiate anything else.
 
If you have not yet departed and they file Chapter 11, you will be party to an executory contract, which can and probably will be rejected by the debtor in possession. 11 U.S.C. Sec. 365. If you have departed but have not been fully paid out yet, you will be a general unsecured creditor with respect to any unpaid amount. General unsecured creditors are at the bottom of the payment waterfall, above only the equity. Even if you leave and get paid in full on your way out the door, if they file Chapter 11 within 90 days after that payment, you will probably be deemed to have received a preference payment and they will get the bankruptcy court to order you to pay it back. 11 U.S.C. Sec 547. You don't say what your position is, but if you are an officer or director of the corporation, the preference claw-back period goes out a full year prior to the Chapter 11 filing.

As many have said, I would take the money now and not spend it until 90 days have passed.
 
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OldShooter said:
Yes. OP is almost certainly an unsecured creditor and powerless to negotiate anything else.
Click to expand...

As with all legal matters, it gets complicated, but I think if the severance agreement is fairly hefty, most of it will be regarded as you stated, as an unsecured creditor.

There's also another risk to consider, which is the risk that any payments made just before a bankruptcy can potentially be clawed back (i.e. reversed, recalled). I kid you not. OP should look up the concepts of "preferential transfer" and "fraudulent conveyance".

Now, if we're talking about a big severance program offered to hundreds of other employees, this is risk is probably low, but if OP is in an executive seat and this is a one-off negotiated arrangement, the risk could be high especially if in an "in the know" role, as in OP has inside knowledge about the financial state of the business.

Food for thought.
 
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Gumby said:
If you have not yet departed and they file Chapter 11, you will be party to an executory contract, which can and probably will be rejected by the debtor in possession. 11 U.S.C. Sec. 365. If you have departed but have not been fully paid out yet, you will be a general unsecured creditor with respect to any unpaid amount. General unsecured creditors are at the bottom of the payment waterfall, above only the equity. Even if you leave and get paid in full on your way out the door, if they file Chapter 11 within 90 days after that payment, you will probably be deemed to have received a preference payment and they will get the bankruptcy court to order you to pay it back. 11 U.S.C. Sec 547. You don't say what your position is, but if you are an officer or director of the corporation, the preference claw-back period goes out a full year prior to the Chapter 11 filing.

As many have said, I would take the money now and not spend it until 90 days have passed.
Click to expand...

Cross-posted at the same time. Total agreement. But, Gumby said all that so much more authoritatively than I ever could have!

EDIT: Gumby, if OP's an insider, I seem to recall the preference period is up to 12 months, but been years since I've been deeply involved in this kind of stuff. Oops, scratch that, I see you covered it!
 
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gauss said:
+1 If you think there is a significant chance of bankruptcy I would probably take the money now and let the taxes be what they need to be.

Even if the taxes are high for one year, remember that this is a once in a lifetime event. Excess taxes won't look so bad if (mentally) averaged over 10 or 20 years. Treat it as such and don't worry once you have the funds.

-gauss
Click to expand...

marko said:
Marko’s third law: "Take the money and run". It has served me well over the years.

If they're already shaky, don't worry about taxes. Take the cash and don't look back. "Bird in hand" and all that......

My severance was paid out over several years, but it was, and still is, a solid outfit.

With few exceptions, I believe one shouldn't let taxes drive financial decisions.
Click to expand...

dobig said:
Man, I just don't think I'd be taking any chance at all here. Options are take the sure money and sleep at night or hope for a few extra dollars and wake up every morning going straight for the news hoping to God you don't see disaster headlines.
Click to expand...
+1 to all of the above, especially the bolded. Or, said another way: if you took that deferral, how much mental stress would you have, counting the days until next year? Not to mention the "what-if" worst case scenario happens and for whatever reason they renege on paying out next year.
 
One more vote for "take the money." A bird in the hand, etc. etc.
 
As someone who designed plenty of severance packages, I would not leave the money at risk. They have no way to "guarantee" it will be there.

You likely would have some priority in bankruptcy as employee compensation but if it gets to that point you are in deep kimchee.

Take the money. And run.
 
LateToFIRE said:
Cross-posted at the same time. Total agreement. But, Gumby said all that so much more authoritatively than I ever could have!
Click to expand...

Thanks, I was a bankruptcy lawyer in a big NYC law firm for a number of years.

Yes, if he is an "insider", as defined in 11 U.S.C. Sec 101(31), he might not want to spend that money for a year.
 
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Montecfo said:
As someone who designed plenty of severance packages, I would not leave the money at risk. They have no way to "guarantee" it will be there.

You likely would have some priority in bankruptcy as employee compensation but if it gets to that point you are in deep kimchee.

Take the money. And run.
Click to expand...


Here is a useful article about the treatment of severance claims in a Chapter 11 case.
https://www.blankrome.com/sites/def...on_and_severance_agreements_in_bankruptcy.pdf
 
Take the money now, and run. You may not get it tomorrow.


momoney said:
Not sure if this is the best place to post, but severance would be used for FIRE money.

I was offered severance with the option to defer until next year. That sounds like a good idea for taxes. I'm worried though because the company is in financial turmoil. If things keep getting even worse, could the company deny paying the severance next year?

I know severance is not guaranteed in most states. If they offer you a payment in exchange for signing away any claims against them, is that a binding agreement? Perhaps none of this matters if they file bankruptcy?

Would you just take the money and run?
Click to expand...
 
For sure take it now, don't let taxes be a factor vs the risks you cite.
 
It's a mega sized company with lots of debt. There is no negotiating it. I will follow Steve Miller's advice and everyone else here and take the money and run. :)
 
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