Every business should have established guidelines concerning severance pay. Guidelines are critical to protecting the employer from lawsuits based on claims of unfair business practices or discrimination.

To institute a severance policy that is reasonable and legal, consider the following:

1. Who Is Eligible?

To determine who is eligible to receive severance pay, answer these questions:

• What events qualify an individual for severance pay?
• Does layoff due to a reorganization qualify?
• Does termination due to elimination of a position qualify?
• Are employees who are terminated for gross misconduct eligible?
• Does discharge for poor job performance qualify an individual?
• What if the person obtains another position within the company, a related company, or the company acquiring the business?
• Are only actively, regularly employed individuals eligible?
• Are employees covered by a collective bargaining agreement or employees who have an individual, written employment contract covered?

2. What Will the Payment Schedule Be?

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?

3. How Will You Coordinate 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?

4. What Exceptions Will You Make?

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), make that clear.

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5. What Unemployment Terminology Will You Use?

Keep in mind that a former employee's eligibility for unemployment benefits may be affected by the terminology used. 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 not qualify the individual for unemployment benefits until the end of the period for which the pay is intended.

6. When Will Payment 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 some time after he or she leaves.

7. Must You Consider Union Contract Provisions?

If the company is unionized, severance pay may be a matter requiring negotiation. Review relevant portions of the contract before you write the policy.

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