Labor and Employment

Should You Accept a Buyout or Early Retirement Package?

By Lisa Guerin, ​J.D., Boalt Hall at the University of California at Berkeley

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Have you been offered a buyout, early retirement plan, or severance package? Employers offer these incentives for employees to quit so they can trim their payroll costs without firing anyone. If you are offered a buyout or early retirement, you’ll need to consider the terms carefully to decide whether it makes sense for you. And, if you have any potential legal claims against your employer, you should speak to an experienced employment lawyer before signing any severance agreement.

Buyout or Early Retirement?

Buyouts and early retirement plans are just different names for the same thing: a package of benefits an employer offers to employees as an incentive to quit. Typically, an early retirement package is offered to an older employee who may be nearing retirement age, while a buyout is offered to a younger employee who will be seeking another job.

If the employer has a pension plan or other retirement benefits, an early retirement package might bridge the employee to retirement. For example, the package might credit the employee with additional years of service so that the employee can begin receiving retirement or pension benefits right away. Or, the package might pay for health benefits until the employee is eligible for Medicare.

What’s in the Package?

To decide whether to accept an early retirement or buyout offer, you’ll first need to consider what you’re getting. The main component of most packages is, of course, money. An employer might offer compensation according to a formula based on years of service. For example, some employers offer one or two weeks of pay, at your current or highest salary level, for every year that you’ve worked at the company. Other employers offer a lump-sum payment that doesn’t depend on tenure.

Other benefits might include paying the cost of continuing your health insurance for a period of time, outplacement services to help you find a new job, or allowing you to keep company property, such as a company car or laptop.

What Are You Giving Up?

Before you agree to a buyout or early retirement incentive, make sure you understand the price you will pay. Of course, you will no longer have a job if you agree to quit, so you will be giving up your salary and benefits except for what the agreement provides. However, many employers also ask employees to sign a severance agreement, in which they agree to give up (or “waive”) their right to sue the employer for any legal claims arising out of the employment relationship. If, for example, your employer failed to pay you overtime or subjected you to sexual harassment, you won’t be able to pursue those claims if you waive your right to sue.

This is one very important reason why you should speak to a lawyer before signing a severance agreement. If you have any legal claims against your employer, you should make sure the severance reflects the value of what you are giving up. A lawyer can help you figure out what your claims are worth and negotiate the best deal with your employer. (For more information, see Severance Agreements FAQ.)

The severance agreement may also include a noncompete clause: a promise that you will not work for a competitor or open your own competing business for a certain period of time after leaving your employer. If you know you will retire, this might not be important to you. But if you will be looking for a new job, you might want to negotiate this term as well. Noncompetes are not legal in every state; California won’t enforce them, for example). And even states that allow noncompetes may limit how restrictive the terms may be. A lawyer can help you evaluate a noncompete agreement and decide whether it is acceptable.

You should also understand how your buyout or retirement agreement will affect your right to unemployment benefits. If you quit your job voluntarily, you typically will not be eligible for unemployment. If, however, you quit only because you were facing a termination, you will likely still be eligible. The way your severance payments are structured might also affect your right to benefits. Payments that stretch out over time, like a regular paycheck, are more likely to disqualify you. Talk to a lawyer if this is a concern for you.

Think Before You Sign

As you can see, agreeing to an early retirement or buyout package is a big decision. You’ll need to consider whether the package meets your financial needs if you plan to retire. If you will look for another job, is your employer offering you enough to float you until you can find work? And, is what you will receive worth what you are giving up to get it?

Some employers ask employees to sign severance agreements quickly, perhaps even as short as a day or two. However, if you’re at least 40 years old, your employer might be legally required to give you additional time to consider the agreement. Under federal law, you must be given at least 21 days to consider any agreement that asks you to waive your right to sue for age discrimination. You are also legally entitled to revoke the agreement for seven days after you sign it. And, if you are part of a group of employees who are offered a retirement incentive, your employer may be required to give you certain information about the program and the employees to whom it was (and was not) offered. (For more information, see our article on age discrimination.)

Talk to an Employment Lawyer

Whether to sign an early retirement or buyout agreement is a decision that may shape your finances for years to come. Before you put a price on your legal rights or your continued employment, get some advice from an experienced employment lawyer.

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