Compensation, Employment Law

Severance Pay Basics and Policy Considerations

Severance benefits are payments made to employees upon termination of employment caused by events that are beyond their control, such as workforce reductions, plant closings, company takeovers, and mergers. Severance benefits are sometimes offered to encourage early retirement or voluntary resignation, or to discourage terminated employees from suing an employer.

leaveSeverance benefits are not required by federal law and are required only by a handful of states. However, most companies offer severance pay. The payments themselves may be a one-time occurrence or spread over a period of time. These benefits are usually calculated by the employee’s length of service with the company (e.g., one week of severance pay given for every year employed with the company).

Severance Pay Policy Planner

Every business should have established guidelines concerning severance pay. Such a policy not only provides employees with guidelines, but also protects the employer from lawsuits based on claims of unfair business practices. Severance policies will vary according to an employer’s needs.

To institute a severance policy that is right for you, consider including sections that address:

Severance Agreements Webinar

On July 13, join attorney presenter Joshua H. Viau as he goes through the ins and outs of the good, the bad, and the prohibited when it comes to severance agreements—so you can be confident that you’re reducing your legal risks rather than adding to them. See below for more information or to register.

  • Rationale. Briefly state the reason for granting severance pay.
  • Eligibility. Who is eligible to receive severance pay? Are only actively, regularly employed individuals eligible? Are employees covered by collective bargaining agreement or employees who have an individual written employment contract covered? What events qualify an individual for severance pay? Does discharge for poor job performance qualify an individual? Does layoff due to a reorganization qualify? Does termination due to elimination of a position? Eligibility is usually limited to employees whose termination has been initiated by the company. Be sure to mention any other limitations regarding eligibility.
  • Payment schedule. If the amount of severance pay is linked to length of service, explain how it is determined. Is the amount of severance pay based on a base salary, a bonus, overtime, or other compensation? Will there be any amounts deducted from the severance pay?
  • Coordination with other benefits.Will the amount of severance pay be increased or decreased as a result of other benefits? For example, will someone who is on disability be eligible for severance pay? If disability pay ends because a job is eliminated, does the person then receive severance pay? Is severance pay reduced by any amount payable because of a competing state law?
  • If there are some groups of employees who receive different treatment or who will be handled on an individual basis (e.g. high level executives), say so.
  • Keep in mind that a former employee’s eligibility for unemployment benefits may be affected by the terminology used for “severance pay” or “pay in lieu of notice.” When using the term “severance pay,” unemployment offices may view the individual as being immediately eligible for unemployment benefits. In contrast, using the term “pay in lieu of notice” may qualify the individual for unemployment benefits until the end of the period for which the pay is intended.
  • When payment will be received. Will the employee receive his or her severance pay on the last day of work, or will it be mailed to his or her home at a later date? Will the pay be provided on a regularly scheduled payday? Will the payment be made over time (i.e., 3 months’ severance pay paid over 6 months)? Keep in mind when deciding to pay severance that the cooperation of the employee may be needed for sometime after he or she leaves.
  • Maximums and minimums. Regardless of the formula for severance pay, it is a good idea to establish a maximum and a minimum for it. There may be exceptions to this where employers will want to pay more or less than those amounts. For example, an employer may want to increase severance pay beyond the normal rate if an employee asserts a discrimination claim against the company. In contrast, employers may not want to pay severance pay to an employee caught stealing.
  • As a condition for the payment of severance benefits, employers may require the individual to release them from any claims, such as violations of any discrimination law. Care should be taken to ensure that such a release is binding and enforceable.
  • Employers may wish to provide that an employee accepting severance pay cannot compete with them for a specific amount of time. This period may be linked to the amount of the severance pay or its duration.

There are a number of other considerations that must be made when crafting and executing any severance agreement with a departing employee—these include Employee Retirement Income Security Act (ERISA) requirements, myriad tax issues, special rules for older workers and more.

On July 13, BLR presents a new webinar– Severance Agreements: When to Use Them and How to Draft Them to Limit Company Liability–featuring attorney Joshua H. Viau, who will provide all of the ins and outs of offering severance agreements, including:

  • The keys to severance agreement compliance—what you can say, what you should never say, and everything in between
  • Whether it’s a good idea to allow someone to resign (rather than being terminated) to avoid having to explain a firing to future employers
  • Writing you should draft in support of any severance or separation agreement
  • Tips for handling employees who may become combative or litigious when faced with termination
  • Language that should be included in every severance agreement
  • What to do when an employee refuses to sign—or threatens to sue
  • Severance health benefits, which raise COBRA interaction issues
  • And much more