What To Do If Your Client Was Laid Off

Getting laid off is an unexpected outcome that employees may face throughout their careers. As advisors, we have an opportunity to help clients with the emotional and financial aspects of this experience. We can add value beyond the six key areas of planning during a time of uncertainty.

Once your client receives notice about the layoff, they will need to make several important decisions in the following weeks. The steps below will help build resiliency into your client’s financial plan as they navigate unemployment.

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Step 1: Support the Emotional Experience

Being laid off is a stressful and emotional experience. It’s often associated with confusion and thoughts of inadequacy and underperformance. Clients must understand that layoffs are a strategic decision. They aim to fix an underperforming business unit that hurts the company's finances and growth. They’re generally not designed to target an individual. Layoffs are an unfortunate norm in tech. This is due to the need to meet investor demands and the typical operating structure of a tech business. These include profitability, funding, burn rate, and staffing for growth vs. actual needs.

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An advisor’s job is to help the client keep a clear head as they will need to make many very important decisions over a short period of time.

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Step 2: Review Severance Terms

It’s critical that clients fully understand the terms of their severance. These documents are their guide to separating from the company. They contain important info about payouts, benefits, and other terms (e.g., non-disparagement clauses, right to sue). In general, the employer will not be able to ask for something (like non-disparagement) unless they are offering something (like severance).

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  Financial Payouts

• Severance - the compensation an employer provides to an employee after their employment with the company is over. Companies aren't legally required to pay an ex-employee severance. But, it's now common to pay two weeks of severance for every year the employee worked at the company.
• Paid time off (PTO) - employees may receive a lump sum payout for any accrued PTO at separation, unless the company is insolvent. But, “unlimited” PTO plans generally don’t support this because employees have not accrued a specific number of vacation days.
• Expense reimbursement - employees may submit claims for any qualifying expenses incurred while employed by the company. Employees should communicate with the HR team to confirm that their reimbursements are handled correctly.some text
  • Employees can usually use their Flexible Spending Account (FSA) funds. The expenses must be qualified, and receipts must be submitted before the deadline. This includes dependent care FSAs and health care FSAs.

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Benefit Coverage

• Insurance coverage - companies may cover healthcare and other insurance costs (e.g., vision, dental, critical care, etc.) for a time after separation. After the term, the employee must elect COBRA or buy private policies to continue coverage.
• Companies may also offer benefits like company cars and gym memberships. Employees can find details in the terms.

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Disclosure Agreements

• An employee will likely need to sign non-disclosure or non-disparagement agreements as part of their severance terms. The company puts these mechanisms in place to ensure that it protects its confidentiality and image.
• Employers often ask ex-employees to sign a common agreement. It states that the ex-employee will not pursue legal action. This protects the company from any legal action taken by an ex-employee.

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If the client's situation is complex, an attorney should review the severance terms. This will ensure there are no flags the client should know about. This can be costly when the client is no longer employed. So, it's important to check the employee's situation before recommending legal services.

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Step 3: Negotiate Severance Package

Issuing a severance package is not legally required when terminating an employee. Exit packages show goodwill for the employee's work. They may also protect the company's image. If the terms aren’t favorable or representative of the contributions made to the company, an employee can try to negotiate a better package.

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Employees can negotiate for things like cash, equity, and health insurance. This includes:

• Accelerated vesting of company equity grants.
• Extended post-termination expiration windows.
• Extended health insurance coverage.

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Advisors should help the client understand which aspects of the exit package are most important and orient negotiations around those terms. Companies with more protective agreements in the severance terms may be willing to improve the package to get an employee to sign quickly and quietly.

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Step 4: Equity Review

Employees must understand company equity when leaving the company. The catalyst (e.g., acquisition, downsizing, etc.) will impact the employee’s equity differently. Advisors should help clients review the separation terms to understand how to manage their equity position going forward.

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Ownership

• Vesting ends effective immediately on the date of separation. All unvested stock options and restricted stock are forfeited and returned to the company. The employee will retain vested RSAs and RSUs since they have satisfied the time-based requirements. The subset of equity that employees need to pay attention to is the vested and unexercised stock options. Employees can buy the options before the post-termination deadline. Options are forfeited and returned to the company if they are not exercised before they expire.

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Post-Termination Exercise Windows

• The clock starts ticking on the employee’s exercise window on the termination date. Some companies offer a longer window. But, the post-termination exercise window is usually 90 days. So, clients must decide quickly. Employees can find their expiration terms in their original stock option agreement.

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Exercise and Funding Decisions

• If an employee wants to exercise vested options, they must check their capacity to take the investment risk. This includes the sources of funding and specifies when the options will be exercised. Depending on the client's finances and optimism about the company, stock option financing can be a good fit. Financing lets the employee hold more of their options. It limits immediate out-of-pocket costs. Note that financing approval depends on many circumstances and may not be available to the employee.

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Step 5: Financial Review

On average, it takes an employee 3 to 6 months to find a new job after being laid off. This unplanned period of time requires thoughtful planning to navigate. It's vital to do a thorough financial review. It will clarify and guide the employee on how to navigate this period financially.

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Break-Even Analysis

• Help your client calculate their break-even point while unemployed. This should include expected severance income and any other income. It should also include total financial obligations. This figure lets the employee know how long they can pay their bills without a steady income before running out of money.

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Emergency Reserves

• Clients may need to use their emergency fund. It will help them meet their financial obligations without interruption. If a client hasn't fully funded an emergency fund, they must look to other assets or take the first job available, even if it is not their ideal job.

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Liquidate Investments

• If cash may run out before securing the next job, clients may want to liquidate part of their brokerage accounts in a tax-efficient way. They should raise enough cash to cover their bills until they are employed again, with a buffer for safety. Keeping dollars invested may not be worth the risk over the short term.

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401(k) Management

• Clients must decide to leave their 401(k) alone, roll it into an IRA, or wait and roll it into a new plan at their next employer. It depends on the investment options and the hassle of adding this to their other challenges.

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Step 6: Unemployment Insurance

Employees have the right to file for unemployment after being laid off. If they receive their severance as a lump sum, they can file for unemployment on their separation date. If they receive their severance in installments, they can file for unemployment on the last payment date.

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Clients should file for unemployment in the state where they worked (or live if a remote employee). Unemployment can serve as a bridge while finding full-time employment. Each state runs its own unemployment insurance program under federal law. So, your client must review their state's unemployment website. They need to understand the terms and ongoing requirements, like filing two work searches per week to qualify.

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Step 7: Health Coverage

Losing a job is considered a qualifying life event. If clients don't want to elect COBRA, they can switch to a spouse's plan or buy a policy on the public marketplace (outside of open enrollment). COBRA election deadlines are usually 60 days after group plan coverage ends. This is at separation or when company-sponsored coverage ends. Clients should use the 60-day window to review their options and choose a policy that is best for them.

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Consolidated Omnibus Budget Reconciliation Act (COBRA)

• COBRA allows a temporary continuation of group health coverage. It applies to certain life events, like getting laid off.
• When a client chooses COBRA, they continue with the same health insurance plan they already have. Clients will pay 100% of the costs of the plan, including costs the employer previously paid, plus an additional administrative fee. COBRA coverage can last from 18 to 36 months, depending on the qualifying event.

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Affordable Care Act (ACA)

• ACA is America’s public health exchange. While not legally required, an individual can buy a private policy on the exchange that fits their needs. This is often cheaper than COBRA. But employees should compare policies. They should choose the one that best fits their needs, budget, and preferred in-network providers.

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Short-Term Health Plans

• In most states, clients can buy short-term health insurance for a term of several months to a year (with the option to renew coverage). In recent years, health insurers have launched short-term plans. They aim to help those needing an affordable, temporary medical plan. This can be a cost-effective solution to ensuring an employee retains health coverage while between jobs. The drawback for short-term plans is that pre-existing conditions aren’t covered.

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Work From Home Plans

• After the ACA passed, "work-from-home plans" became popular. They offer health insurance by becoming an employee of the union or an association member. These unions and associations have group plans for their members. Their acceptance policies vary.

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This seven step framework is another way to add value to clients during this stressful transition. As a trusted advisor you can limit the time it takes for your client to continue compounding their financial capital and their human capital.

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