Want to Know What an Employee Buyout Is?

Things You Need to Know Before Accepting a Company Buyout

graphic of hands holding scissors cutting man on a string
•••

yuoak/Getty Images

Buyouts are a common method for reducing the number and cost of employees. In an employee buyout, the employer offers some or all of their employees the opportunity to receive a large severance package in return for permanently leaving their employment.

This allows the employer, in return, the opportunity to significantly lower their costs of operation since the salary and benefits of employees and payroll and other related taxes are frequently the largest expense a business has .

What Is Included in an Employee Buyout?

Buyouts range from four weeks' pay plus another paid week for every year worked to the sophisticated severance packages that some auto companies have paid their salaried and union workers to leave. For example, in October 2018, General Motors Co. offered a buyout package to 18,000 salaried employees to reduce labor costs.

These employee buyout packages can also include benefits such as extended health care insurance and educational and job search assistance through an outplacement company.

Buyout offers are usually made to non-critical staff. Senior-ranking employees who are close to retirement or cost the company more money than a new-hire would are also common targets.

Offering all employees of a company the buyout is more common during rough economic times and when significant downsizing is necessary.

Reviewing a Buyout Offer

It is important to review a buyout offer carefully and weigh it against your personal career goals and lifestyle needs and plans. Some considerations to take into account include:

Your job prospects and personal marketability.

The older you are, the harder it is to get hired; despite laws and expectations to the contrary, unconscious, and even conscious, age discrimination does exist. When you have more experience, you will often be interviewed by people who in the normal course of circumstances would be reporting to you.

Keep in mind that some people feel threatened by another person with more knowledge and experience. Factors like these may lengthen the amount of time it takes you to become employed again. Will the buyout cover your expenses until you find new employment?

How close you are to retirement.

Will early retirement affect your social security benefits? How much money have you saved otherwise for the expenses you will need to cover for the rest of your life? Decisions about accepting a buyout must include your personal savings in case you are unable to find employment or you are forced to accept a job that decreases your income significantly. You need to look internally as you make the decision about whether you are actually ready to retire.

Is the offer a lump-sum payment or payable over time?

If the buyout is offered in smaller payments over time, how stable is the company, and can you rely on them to fulfill the promise to pay? If the buyout is in a lump sum, are you prepared to seek professional advice to invest the sum wisely to ensure a prosperous and comfortable retirement? More and more Americans are concerned that they may never be able to retire.

Your desire for a career change.

Some employees use buyouts to pay for a new college degree or to open their own business. It will depend on how anxious you are to try to develop a second career. An employee buyout is an excellent way to provide the funding you need for a career change.

What happens to any personal leave accrued?

Personal leave you have accrued can amount to a large sum of money when you accept a buyout. Ask whether the employer will pay additionally for any paid time off or leave that you have accrued. You also need to ask about what bonuses and other perks you will receive with an employee buyout.

Each situation is different and everyone has unique circumstances that they must consider. It may be best to review a buyout offer with a financial professional and an employee-side employment law attorney as well.

The Release From Liability Agreement

In return for the severance package, employees are generally required to sign a release from liability for the employer. This is an agreement between employee and employer that the company will not be sued or held responsible by the employee.

The release from liability comes with many different names in different organizations. It may also be called:

  • Waiver of all Claims
  • Release of Claims
  • Hold Harmless Agreement
  • Indemnification Agreement

The bottom line is that the employee agrees not to sue the company in return for the buyout funds.

Buyouts vs. Layoffs

Buyouts are not easy decisions for a company or its employees. They are often offered when there is a critical need to reduce operating expenses and in hopes of avoiding or reducing layoffs. Unfortunately, when too few employees accept the buyout offer, employers are often forced to lay off employees anyway.

The Bottom Line

Sometimes, the employees laid off are people who chose not to accept buyouts. This contingency should be made clear to employees when the buyouts are offered so employees know that a layoff is possible. That, too, can factor into buyout decisions.