International Considerations for Executive Severance Plans

It is common practice for US-based multinational companies to adopt executive severance plans to provide for additional benefits to be paid to executives in the event of certain specified termination events, including those in connection with the change of control of the parent. These benefits may consist of cash payments, favorable treatment of equity awards, and/or other benefits (e.g., payment of health insurance premiums).

These types of plans help companies recruit and retain talent and also provide some certainty around payments which will be made to executives upon termination while securing a release of claims for the company. Multinationals with executives in countries outside the US often desire to cover their non-US executives under the same plan.

In this article, we aim to explain why it is difficult to extend US executive severance plans to non-US executives and the approaches companies can consider to provide equivalent severance benefits to their non-US executives.

General Considerations for Executive Severance Plans Outside the US

Generally speaking, it is difficult to implement global severance plans which cover US and non-US executives or other employees because most countries outside the United States do not have “at-will” employment and already offer termination protections and entitlements under local law.

Executive severance plans also often begin their existence as US-centric documents and are typically drafted to comply with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Many of the legal concepts on which these severance plans are based are US-focused (i.e., pay out if the executive is a “good leaver,” ERISA appeals processes, provisions to ensure compliance with Sections 409A and 280G of the Internal Revenue Code, COBRA reimbursement benefits, among others).

Generally, there are three main approaches companies can use to extend US-style severance benefits to non-US executives. We explain the key points for companies to consider under each approach below.

Approaches to Extending US-Style Severance Benefits to Non-US Employees

There approaches companies can take to extend severance benefits to non-US employees.

Approach #1: Global Plan with the US Entity Covering Employees of Subsidiaries

Under this approach, the US plan is “globalized,” and the same plan is rolled out to all eligible executives globally. In order to create a plan which covers both US and non-US executives, the plan typically needs to be revised to qualify US-centric provisions which are inapplicable or problematic outside the United States and add language to mitigate risk and avoid creating additional liabilities for the company.

Overall, this is a common approach among US-based multinationals whose participants are located primarily in the US with smaller populations in other countries. The reason is that this plan structure is easiest to administer in practice since there is one global plan document for all participants. However, structuring the plan under one global umbrella means that certain US-centric provisions in the plan will not be fully enforceable or may be ambiguous under local law in some countries even following “globalization.”  Provisions which are typically revised include: 

Offsetting Local Termination Entitlements: Most countries outside the US have laws providing for statutory notice and severance entitlements on termination. Notice entitlements and statutory severance formulas are often tied to an employee's years of service with the employer such that more senior executives could be entitled to generous payouts as a matter of law.

Additional termination entitlements may be found in local collective bargaining agreements, works council agreements or local work rules and policies. As such, it is important to clarify that any payments under the plan will be offset by any statutory/contractual entitlements that the employee may already be eligible for under local law/rules on termination (i.e., the plan payouts are designed to be inclusive of any other entitlements).

Health Coverage Reimbursement: Many countries outside the US do not have legislation comparable to COBRA, which allows employees to continue participating in their former employer's group health plans following termination, and coverage often ends on the termination date. However, depending on the jurisdiction, employees may be eligible to apply for government-funded healthcare. As such, any COBRA reimbursement benefits in the plan need to be carved out for non-US executives, and the company should consider whether it would like to offer another incentive in lieu of COBRA (i.e., cash payments to allow employees to procure coverage under supplemental plans).

Requiring Local Releases: The plan provisions should be drafted broadly to require employees to sign a locally compliant release of claims or mutual separation agreement in the form provided by the company in exchange for any payments. The form of the release will depend on the jurisdiction and, in some instances, the employee will need to be independently represented by counsel for the release to be enforceable.

Equity Awards: These types of plans often combine benefits which will need to be paid out by the local employer (i.e., cash severance) and favorable treatment of equity awards, such as equity award acceleration (which is a benefit that is provided by the parent company which granted the equity award).

Generally, our recommendation is to keep the parent company’s equity program separate from any local payments in order to mitigate the risk that equity award income is considered a component of the local employment relationship and of local compensation, which can lead to entitlement claims, inclusion of award income in calculation of severance and various other employee claims.

To maintain this separation, it is recommended to break out the payouts into two separate global plans - one which only addresses the equity award treatment and the second which addresses payouts to be made locally such as additional severance payments.

Implementation: To avoid local challenges to the plan provisions, it is necessary to consider the local implementation requirements for the plan to ensure the key provisions (i.e., requirement to sign a release) are enforceable. Local implementation requirements may involve consultation with the employees, procuring employee acknowledgements to the plan, and others.

Choice of Law: Finally, companies should note that US choice of law and forum and ERISA appeals procedures generally will be unenforceable vis-à-vis non-US employees.

Approach #2: Local Plans Per Country with Local Employing Entities under Local Law

An alternative (and more conservative but less common approach) is to have the US plan reviewed in line with local law so that the plan can be issued by the local employing entity in each jurisdiction. This allows the company to tailor the plan provisions in line with local law as much as possible (i.e., to remove US-centric language, tailor any benefit payments, and incorporate specific local concepts so that the intent of the provisions is clear) to increase likelihood of enforceability locally and remove ambiguities.

This approach may be recommended if the plan may be under greater scrutiny locally (i.e., where the company has a local works council or employee representative) but the company would like to preserve the general structure of the payouts. Again, under this approach, if the parent is offering beneficial treatment of equity awards, it is advisable documenting this treatment in a stand-alone plan with the parent company to avoid comingling local employment benefits and the treatment of parent equity awards in the same document.

The main downside of this approach is that it can be more burdensome and costly to roll out and administer because it requires periodic review and updates of individual country plans as local laws develop and as the global plan structure evolves. Depending on the country, this localized structure for the plan also may not be consistent with market practice from a local employment perspective. For example, there may be severance procedures and requirements under local law in some countries which conflict with those contemplated by the plan.

Approach #3: Employment Agreement Amendments

If there is a limited number of severance eligible executives outside the United States, we sometimes see companies enter into amended employment agreements with such executives to incorporate the new severance terms and forego the rollout of the plan. Under this approach, new severance entitlements are tailored for the specific individual in light of their statutory and contractual payouts under local law.

The benefits of this approach are similar to the local law compliant plans as outlined above (i.e., provisions are tailored for local law as much as possible, thus avoiding potential ambiguities or disputes). However, this is generally a minority approach because amending individual employment agreements is a costly and burdensome process which requires individual negotiations. Further, once these terms are incorporated into amended employment agreements, the company will not have flexibility to make unilateral changes to these terms in the future.

Proceed with Caution

Regardless of the approach taken, companies should be aware that once the executive severance plan has been implemented outside the US, it may be difficult to unilaterally revoke the plan or amend the plan despite terms in the plan which try to provide otherwise.

Further, since there is no at-will employment, putting a severance plan in place for non-US executives can create a minimum standard of benefits which international executives may use to negotiate a more favorable exit package than originally anticipated as part of mutual separation discussions.

As such, companies should proceed with caution when they export US severance plans to their executives abroad.