Severance Pay in Washington State

Dan Rosen announced on his blog last week that he has changed his model term sheet, for use in seed stage angel financings, to prohibit employee severance agreements.

Dan's worried about a feature of Washington State law that permits employees to reach around the corporate firewall and hold individual board members liable for unpaid wages. And severance counts, in Washington, as wages.

Dan doesn't get into this in his post, but the principal statute used in Washington to pursue these kinds of claims may also provide for DOUBLE the wages owed PLUS attorneys fees. These are attractive cases for plaintiffs lawyers to bring. In my experience, such cases almost always settle on terms that are very favorable to the employee.

I think it's atypical for a seed stage company to have employment agreements, let alone employment agreements with significant severance obligations. Usually, severance first comes into the picture when the company recruits a chief executive or other key officer from outside the group of original founders. And quite often, those individuals are savvy enough to insist on some kind of cushion at exit, if only to give them a decent stretch of time to find another job in the event they are fired.

I think modest severance arrangements are often a fair price to pay to pull in a key officer from the outside at a critical time in an emerging company's growth. But Dan's right about the upshot; a board has to take a severance obligation to an exec as seriously as it does wages owed to any other employee. These severance obligations should certainly be factored in to the estimated "cost" of shutting a company down.

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"Mural in UE Hall, 37 S. Ashland (built 1905). Mural depicts the history of the United Electrical Workers union, which was founded in 1936. Painted 1974 by John Pitman Weber." Photo by Eric Allix Rogers / Creative Commons.


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