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With the economy in flux and employers thinking about how to stay afloat, you should be considering all of your options--including whether to take a buyout--to make sure you and your family are taken care of financially.

In the past three weeks, more than 17 million Americans have filed for unemployment and in one survey, almost half of companies say they are somewhat likely to layoff employees because of the economic ramifications of COVID-19.

In this article, I’m going to talk about buyouts–what they are and whether or not you should consider taking one (or be proactive and negotiate one).

What Is a Buyout?

A buyout is when your employer pays to end your employment so they no longer have to pay you as an employee. Effectively, they’re “buying you out of your contract.” Often, organizations do this to cut down on expenses or if they are downsizing.

Companies may be considering layoffs or buyouts since the COVID-19 pandemic is taking a toll on the economy and impacting businesses.

But there are other times a company would offer a buyout. When companies need to save money, I often see them work with employees who are close to retirement and/or their highest-paid employees on a buyout agreement. This lets the company cut costs without damaging their reputation or putting the employee in a bad position financially.

While buyouts are typically offered by the organization and are almost always optional, there are times when you can take the lead in prompting a buyout.

Why Should You Consider One?

In times of uncertainty, it might make sense to consider a buyout. Right now, we’re experiencing some unprecedented behavior in the economy and financial markets.

In the vast majority of the country, shelter-in-place orders have forced workers to stay home. Businesses are shutting down. Companies are laying people off. And people are filing for unemployment at record numbers.

You might wonder whether your own employment is secure. In some cases, companies have taken a firm stance in saying that they won’t make any coronavirus-related layoffs. Other companies aren’t so fortunate, and they may have to make cuts.

If your company is in dire straits financially, and you think there may be layoffs coming, should you sit around and wait to see what happens (and hope you don’t get laid off), or should you proactively approach your company about a buyout?

Should You Take the Lead or Wait for Your Employer?

Let’s go through the pros and cons of both waiting for your employer to make their move and being proactive.

Waiting for Your Employer

If you wait for your employer to make a move, there are a few possible outcomes.

The best case scenario (assuming you like your job at least a little–saying nothing of needing the money) is that things go back to normal and you keep your job.

The other end of the spectrum is being laid off. Sure, you can apply for unemployment, but I’ve heard recently of a four-week waiting period for approval, and it may not be enough.

A solution that may fall in the middle is a buyout. Companies are cautious about offering buyouts because it’s a sunk cost. Think about it for a minute–if you’re a business that’s struggling and you need to make cuts, wouldn’t you wait for people to jump ship voluntarily, or even consider laying off your lowest-performing employees?

When companies jump to buyouts, it’s usually a last-ditch effort before they’re forced to make large-scale layoffs.

Taking the Lead

Here’s the thing – this is a SUPER unconventional approach. Most people would never dream of approaching their bosses about being open to a buyout, but hear me out.

Make it clear that you are exploring options, not volunteering to be fired first or saying that you hate your job. Let your boss know you are being proactive and thinking about the needs of you and your family. Your boss may be impressed that you’re looking at things from a logical perspective and are willing to start the conversation. A CEO would surely rather work with a proactive employee than someone avoiding the realities of the economic situation.

I would imagine many employers would be somewhat understanding, especially during times like this.

The advantage here is that you are in the driver’s seat, and you don’t have a ton to lose. Worst-case scenario, your employer isn’t interested, and you’re the first to go when layoffs roll around. That may have happened anyway.

So What’s Best?

There really is no right answer, because it depends on your relationship with your company, how you feel about your job, and a bunch of other factors.

If you’re single, or you have a spouse who contributes to the household income, and you really don’t care for your job all that much, it might be the right move. It’s worth the conversation (I’ll cover more on HOW below).

But, if you’re the only provider, don’t have other career prospects, and don’t have a better plan, then it’s probably best to ride it out and see what happens.

What Things Should You Consider Before Taking a Buyout?

If you determine that a buyout is a possibility, there are several things you’ll want to consider before doing anything permanent.

Do You Have a Better Plan?

If you’re taking a buyout out of fear, then it’s probably the wrong reason. That means you’re looking at the short-term but don’t have a long-term plan. You might suddenly find yourself in a situation where your buyout money has ended and you can’t get unemployment.

But if you’re considering starting a business, going back to school, going to work for a competitor (make sure your buyout agreement doesn’t forbid this), or changing careers, it might be a worthwhile option.

Whatever it is, make sure your plan is laid out and at least somewhat solid before you take a buyout. I worked with a guy who left teaching to get into finance. At 30 he switched careers, using a buyout at his teaching job to help ease the transition.

He knew he’d start at the bottom with the rest of us (I was right out of college), but his plan was to change career paths, and he knew what he wanted. This is a great example of having a better plan.

Understand Position and Interest

Once you reach the point of a buyout discussion, you have to come to terms with the fact your employer either doesn’t want you or is perfectly fine allowing you to leave. It sounds silly, but that pride pill might be a tough one to swallow.

And in most cases, your state is going to consider your employment at-will, which means your organization can cut you loose without a defined reason and not be obligated to pay you any severance. Essentially – your employment is not guaranteed in any way.

Now obviously this is different if you’re on a contract, but for the sake of this article, I’ll assume you’re not. Even more, there’s a strong chance you signed documentation confirming that you understood and agreed to this when they hired you.

So what does this all have to do with a buyout? Put it this way–if they wanted to fire you by now, they could have. But if you’ve reached the point of a buyout discussion, they’re open to ending your time with them in a mutually-beneficial manner.

Remember that by firing you, although they’re allowed to, a company still opens themselves up to risk that you may sue them for whatever reason. But a buyout agreement almost ALWAYS waives that ability–meaning if you take the cash, you can’t sue. And a company will most likely view the upfront cost of buying you out a lot better than dealing with legal issues later. The point here is to understand where the company stands and what their interest is in the matter.

Financial Considerations

For most people, it’s not always clear how you’ll be compensated with a buyout. Unless you’re a highly-paid executive, you’re not important enough for your company to worry about that upfront. So this puts things up for negotiations.

This is often where companies have some level of discretion. But it’s also where you may have the most opportunity for negotiation. Most companies will offer about two weeks’ worth of pay for every year you’ve been with the company.

Now that’s not a “rule” but it’s a common starting point. Two weeks worth of severance is commonly used for layoffs. If you’re negotiating a buyout, you’ll want more.

So again, I think this an opportunity for you to state your case for more money.

The other financial consideration you’ll need to think through is healthcare. Even if you’re getting paid for six months per the buyout agreement, what happens with your healthcare? Will that be covered as well, or will you need to buy your own? If you aren’t covered, you’ll want to go on your state’s exchange to understand the costs. (You have 60 days from losing your company sponsored healthcare to sign up on the exchange–this is considered a life qualifying event that allows for enrollment outside of the open enrollment period).

A good estimate of how much your benefits are worth (including healthcare) is 25% of your salary. That’s a SUPER rough estimate on how much it costs employers to pay for your benefits–so you might use that as a point for negotiation.

You’ll also want to think through HOW the money will be dispersed. If it comes in one, lump-sum check, will you be taxed at a higher rate? Or will it be spread out over the course of the buyout terms?

You can also negotiate to have the dollar amount “grossed-up,” which means your company will up the dollar amount of their payout so the net amount equals what you agreed upon.

For example, if you agreed to a $50,000 buyout and that’s taxed at 25%, you’re not getting the full $50,000. But if they “gross it up,” they might pay you 25% above that $50,000, so when it’s taxed, you end up with $50,000. I’m using rough math, but you get the picture.

Your Future Career Prospects

Think about your career prospects when negotiating a buyout, especially for your resume.

For example, if you take a buyout and have a three-month gap in employment, how will that look on your resume? Can you explain it in an appropriate way?

Or what if you end up not finding the job you’re looking for, and it looks as if you left your company for a demotion–that might raise some red flags.

Think about the industry you want to work in and whether things like an employment gap or something looking like a demotion will have a large impact on you.

How to Start Buyout Talks

So you don’t go burning any bridges, here are a few things to think about when you are ready to approach the discussion:

  1. Find out where the company is headed. This might be a conversation with your direct boss or a “skip-level” meeting with your boss’ boss. Any way you can, try to get a pulse on where the company is headed to determine if it’s the right time for a buyout discussion.
  2. Keep it informal. Don’t put anything in writing, just ask your boss to have an informal conversation and mention that you’d be open to considering a buyout. See how they react before you push any further.
  3. Be logical with your reasoning. Talk about how you need to take care of your family, not that you’re freaking out everyone is going to lose their jobs. Be pragmatic and poised.
  4. Leave it open for further discussion. Don’t push the topic too hard. You want to merely express openness and nothing more. Wait until something more official makes its way to the table. If your employer isn’t offering it, you are basically negotiating, so you don’t want to show all your cards on the first hand.

Final Thoughts: Is a Buyout Worth it?

Look – I get that what I’m talking about might sound crazy, especially during a time when people are losing their jobs. But that’s the exact reason you should be considering a buyout.

No – it doesn’t make sense for everyone. But only you can determine that.

For those who aren’t totally satisfied with their jobs and they can afford to take a little time away (depending on the size and length of the buyout), it might be the exact thing you need.

A relative of mine took a buyout a few years ago. She took some time off, took a lower-stress part-time job, then eventually went back to the company in a new role, making more money.

It ended up working out very well.

Remember that we aren’t in normal times right now. This isn’t a typical economic situation, so you have to adjust your thinking a bit. In fact, I may not have even written this article a year or two ago.

But since we’re in the midst of a pandemic, the rules have changed and it’s time to at least consider your options.

Author Bio

Total Articles: 124
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016.

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