As an employer, one of the things you may consider doing for your employees is providing severance pay. But what is it exactly, how does it benefit you, and how should you implement a severance pay program that achieves the right goals for your company?
What is severance pay?
Severance pay is money that’s provided to an employee who is leaving the company for reasons other than retirement. Typically, the circumstances surrounding severance pay are layoffs, elimination of a position, and a mutual agreement to part ways — for a variety of reasons. The purpose of offering severance pay is to help the employee stay afloat and maintain a decent standard of living while they’re looking for a new job.
How much is severance pay?
A typical severance pay package offers one or two weeks of salary for every year the employee worked at the company. In some cases, the package is higher — executives, for instance, may receive up to one month’s salary for each year worked.
Some senior positions may have an employment contract that dictates the amount of severance pay. And for some companies or certain positions within them, severance packages can include an extension of benefits and/or outplacement assistance for finding new employment.
Most severance pay packages are given as a lump sum following termination of employment, rather than as weekly payments. This is because receiving weekly payments can make an employee ineligible for state unemployment benefits, or severely reduce the amount of unemployment assistance they receive.
How much are you required to pay?
Currently, there is no law in the United States that requires employers to offer severance pay. The only requirement for paying departing employees is under the Fair Labor Standards Act (FLSA), which requires that employers pay terminated employees any regular wages that are due, as well as any accrued, paid time off. This includes vacation time, but not sick days.
The only instance where severance pay is required is when an employment contract or official severance policy is in place. In general, offering severance pay is a goodwill gesture on the part of an employer — and in some cases the offer may be rescinded.
What if your employees try to negotiate severance pay?
Sometimes, most often with employees who have been laid off, an employee may try to negotiate a higher salary or additional benefits than what was offered in the severance package. In these cases, as an employer you would be legally allowed to rescind the offer and refuse to pay severance, since technically the employee has turned down your offer.
However, you may not want to rescind a severance package if the receipt of severance pay is contingent on the employee signing a release of claims — which protects you from any legal obligation or responsibility arising from the employee’s termination. If this is the case, you can either tell the employee that the offer is non-negotiable (usually the best choice if multiple employees are being laid off), or you can consider negotiating, provided the severance package is not guaranteed in writing.
What is a release of claims?
Commonly, departing employees sign a document that releases the employer from all claims as a condition of receiving a settlement package. This release states that you are not liable for the employee’s lack of employment, and frees you from potential future lawsuits. An important note to keep in mind here is that employees over 40 who are leaving the company must sign a separate release for age discrimination lawsuits, which aren’t covered under a standard release of claims.
Providing employee severance pay is a generous act on the part of the employer, and it’s also a means to protect yourself and your company from potentially damaging employee lawsuits. Offering a severance package is a positive and supportive gesture that can build goodwill for your company among both departing and current employees.