What is Severance Pay?
Severance pay is money companies give to employees who have been laid off or fired. It’s basically compensation for ending the employment relationship. Companies usually give 1-2 weeks of pay for each year the person worked there. Executives often get a month’s pay for each year of service. Their employment contracts might also spell out a set amount of severance pay they’ll get if let go.
Does Every Company Have to Provide Severance Pay?
No, there’s no federal law in the U.S. that requires severance pay. The Fair Labor Standards Act doesn’t say anything about it. Unless an employment contract or company policy promises severance pay, it’s up to the employer whether they want to give it.
A few cases where severance pay is mandatory:
- If an employment contract specifies severance pay details, the company has to follow that.
- Some states and cities have laws about severance pay during mass layoffs or plant closures. Companies would need to check local laws.
- If a company has an internal policy or collective bargaining agreement that provides severance pay, they have to abide by the terms.
Otherwise, offering severance is optional for most employers. Many choose to provide it as a goodwill gesture or to smooth the transition for employees. It can also reduce potential lawsuits from disgruntled workers who were let go.
When Do Companies Offer Severance Packages?
Here are some common situations when companies provide severance:
- Layoffs or downsizing where employees lose their jobs through no fault of their own. This helps workers through the difficult transition.
- Employees voluntarily resigning for personal reasons, if the company has a policy of severance in such cases. This can be a retention incentive.
- Employment contracts requiring severance pay for certain terminations. The company must honor the agreed-upon terms.
- Mass terminations or facility closures in places with laws mandating severance pay for these events. Companies need to follow the regulations.
How is Severance Pay Provided?
Severance can be offered in a few different ways:
- Lump sum payment
- Salary continuation for a period of time
- Salary plus benefits continuation
- Installment payments spread out over time
- A package with severance payment plus extras like job counseling or health insurance
The approach depends on the employer’s policies and the situation.
Using Severance Agreements to Protect Your Company
Severance packages often come with signed agreements from employees promising not to sue. This releases the company from legal claims in return for the severance compensation.
Some tips on handling severance agreements:
- Clearly explain the severance benefits offered for signing the release. Additional incentives like bonus pay can motivate employees.
- Ensure employees understand the rights they are giving up, like agreements not to work for competitors.
- Give employees (especially those over 40) enough time to review the agreement and revoke acceptance during an initial period.
- Don’t coerce or intimidate employees into signing. They need to agree voluntarily for it to be legally valid.
Components of a Strong Severance Package
In addition to severance, some extras to consider include:
- Paying COBRA premiums for health insurance for a period of time
- Providing career counseling or outplacement services to aid the job search
- Negotiating what references the company will give during the job hunt
- Offering things like loan forgiveness, allowing workers to keep company cell phones or cars, or releasing non-compete clauses.
The more you can do to help departing employees transition positively, the less chance of legal issues down the road.
In summary, offering severance can end the employment relationship on a good note. While it helps protect employers from lawsuits, care should be taken to avoid discrimination claims during severance negotiations. With some thoughtfulness, companies can design severance packages that benefit both parties.