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Severance Pay Laws: Does It Make Sense to Offer Severance Pay?

In a majority of situations, severance pay laws do not require employers to offer severance packages to terminated employees -- but it could make sense to do so anyway.

Some employers may think that the severance pay laws require them to offer severance packages to terminated employees in the form of some money and continuing benefits. However, in many situations, this is an incorrect assumption as the applicable severance pay laws do not often require employers to provide severance packages. Read on to learn more about when severance may is required and what may be included in a severance package.

Situations Where Severance Pay Is Required

Generally speaking, there are only two situations when an employer is legally required to offer severance pay. First, some states have laws that require employers to offer terminated employees severance pay when their terminations are due to a facility closing or the company is laying off a large number of employees. In these situations (and depending on the state's laws), employers may be required to give a small amount of severance pay. To find out more about the laws in your state, you should contact your state's labor department.

As for the second scenario, employers may be legally required to provide terminated employees with severance pay if they led their employees to believe that they would be paid severance. This is often evidenced by:

  • A written contract (often an employment contract) that calls for a severance package;
  • A promise contained in an employee handbook or book of personnel policies that tells employees that they will receive severance pay if they are terminated;
  • A history within the company of giving severance packages to other employees that are in the same or substantially the same positions as the terminated employee; or
  • An oral promise from the employer to the employee that he or she would receive severance pay upon termination.

There are many employers that often give severance packages to long-term employees that have been with the company for a substantial period of time, even without a legal requirement to do so. In addition to some employers feeling that this is the right thing to do to reward the employee's loyalty and hard work, it often softens the blow that can come with termination and can discourage a former employee from pursuing a lawsuit against the company. Remember that the happier you can keep employees that have been terminated, the less likely that those former employees will decide to sue your company.

Perhaps the key rule to take from this article is that if you do decide to give severance packages to some employees, you must be consistent in who you give severance pay to. If you only want to provide severance pay to "higher-ups" in the company, be sure to draw a clear "cut-off" line. This does not mean that you must provide equal amounts of severance pay to each employee that gets above this line.

Instead, you can also institute a policy that makes the amount of severance pay dependent upon the length of employment. By doing so, you can honor your longtime faithful employees without having to give big payoffs to employees who leave the company after a short employment.

If you are ever less than honest and equal in giving out severance pay, you risk being sued for discrimination. If, for example, your company decides to give men a 20 percent increase in severance pay without any justification, you could face a discrimination lawsuit from the women that are entitled to severance pay.

Things to Include in a Severance Package

What you decide to include in your company's severance package is entirely up to you (unless you are already tied down by a contract or a promise). When designing a severance package, you should keep the goal --softening the blow of termination -- in mind. In working towards this goal, you should take a look at the following list:

  • Money or Pay: This is perhaps the most important component for the employees that you are forced to terminate. A fair severance package will often include a week or two's worth of pay for each year that an employee worked for the company.
  • Insurance and benefits: There are a number of employers that also agree to continue to pay for a terminated employee's heath, life and disability insurance for a period of time following termination. Keep in mind that there is a federal law called COBRA (the Consolidated Omnibus Budget Reconciliation Act) that may require your company (if you provide group health insurance to your employees) to offer terminated employees the opportunity to continue their insurance coverage. However, COBRA does not require the employer to pay the bills. In addition, many states also have laws that deal with the continuation of health care, and a few of these state laws also require employers to pay for the health care for a short period of time. To find out about the laws in your state, you should contact your state's insurance department.
  • Uncontested unemployment benefits: Terminated employees often file for unemployment benefits if they were terminated for reasons other than serious misconduct. Most of the time when an employee files for unemployment benefits, their previous employer has the opportunity to contest the employee's claim. If you do not contest the employee's benefits claim, the employee has a much more likely chance of receive unemployment benefits.
  • Outgoing Employee Services: One of the key outgoing employee services that you can offer in a severance package is an outplacement service. This service is run by your company and will help terminated employees find new jobs. To do this, you should think about offering career counseling, résumé-writing seminars, job leads and even practice interviews. Remember that you may be firing employees that have not had to look for a new job in decades.
  • Letters of Recommendation: This can be a small but powerful option for you to offer in your severance packages. By agreeing to write letters of recommendation, you have the opportunity to really insulate your company against potential lawsuits. However, providing references and letters of recommendation can have their own risks.
  • Other Benefits: Whenever possible, it is always best to sit down with an employee that is going to be terminated and hash out just what it is that he or she is really looking for in a severance package. You may be surprise to find out how little some employees really want. Some things to consider in these conversations are letting the employee keep equipment (cell phones, laptops, printers), getting employees released from non-compete agreements or providing ongoing gym memberships.

Get a Free Legal Evaluation of Your Severance Pay Questions

Before agreeing to offer severance pay to terminated employees, employers should seek legal advice. A qualified employment law attorney can help you decide if outgoing employees will be entitled to parting compensation. Get a head start today with a free legal evaluation of your severance pay and other employment-related matters.

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