The Separation between Severance Packages and Agreements

Often discussed hand-in-hand, severance packages and agreements have important differences.  A severance package refers to an employer’s offer of added money and / or benefits to a terminated employee.  A severance (or separation) agreement refers to a written agreement in which the departing employee agrees to certain promises made to the employer.  The following information will identify the main types of severance options available to assist the employer in determining what separation arrangement may be most prudent for the business.

Severance Package

While no law requires an employer to pay any severance beyond the employee’s regular compensation, the following represents commonly considered items:

  • Monetary Pay.  Many employers pay either a lump sum or a distribution over a number of weeks.  Depending on the size of the business, one common formula is to offer one or two weeks of salary for every service year of employment usually with a minimum of four to eight week’s worth of equivalent pay.
  • Benefits Coverage.  Some employers completely or partially pay for continuation of health (i.e. federal COBRA or state mini-COBRA), life, and / or disability insurance coverage for a certain time period.  Other types of benefits coverage to consider extending include an employee assistance program (EAP) which may offer professional grievance counseling support.
  • Unemployment Insurance.  An employee may claim unemployment compensation for which the employer may agree not to contest.  If the employer agrees not to challenge the claim, the likelihood of the employee receiving the benefits increases.
  • Outplacement Services.  An employer may offer outplacement support to help an employee find a new job.  By providing job search skills and career coaching services, this resource can help the employee transition away from your company.
  • Nontraditional Options.  On a case-by-case basis, you may decide on additional items as part of the package such as having the employee keep company equipment (i.e. cell phone, laptop, software tools, etc.), waiving pay advances or negative vacation / sick / PTO balances, and / or extending company product or service discounts.

Severance Agreement

A severance agreement is not a mandatory business requirement.  Depending on the nature of the business and the market landscape, however, you may consider specific conditions as part of the employment separation.  While usually intended to release the employer from certain claims, such written agreements may include:

  • Non-compete. An employee promises not to compete with his or her employer for a specified time in a particular place.
  • Non-disclosure. This promise restricts the employee’s use and disclosure of items such as client lists, pricing, and other confidential or proprietary information.
  • Non-disparagement. Under this provision, the employee shall not discredit, defame, or slander the employer.
  • Non-solicitation. This “restrictive covenant” restricts the employee from soliciting the employer’s customers and / or hiring its employees away from their current positions.

Severance Determination

As a general rule, an employer may be required to provide severance compensation in two situations: (1) obligations under federal and state Worker Adjustment Retraining & Notification (WARN) Acts and (2) certain verbal or written contracts or agreements leading the employee to reasonably believe that he or she would be paid.

Note: The WARN Act requires employers with 100 or more employees to give employees 60 days advance notice of plant closings and mass layoffs.  If an employer gives at least 60 days advance notice, no severance pay is required.  If the employer fails to give the required notice, the law requires the employer to pay its employees for up to 60 days.

Regardless, employers do have flexibility in setting the eligibility criteria for any severance package. Different employees can be included, and different formulas can apply to different job groups.  On the other hand, since employers still need to demonstrate some degree of fairness, employees in protected classes should not be discriminated against.

Severance Policy

One common question employers have is whether or not to establish a written policy.  In general, having a formalized severance policy in writing makes more sense for large companies more likely to be subject to the WARN Acts.  On the other hand, an unwritten informal, individualized approach tends to work better for small businesses and companies with infrequent departures.

For most severance policies, useful statements may include:

  • “Employees who sign an agreement releasing the employer of employment liability agree to do so on an informed and voluntary basis.”
  • “The purchase of the business by another company will not require the payment of severance, unless employees are actually laid off.”
  • “The company reserves the right to alter or terminate its severance policy.”

Note: The Age Discrimination in Employment Act (ADEA) protects employees age 40 or older and requires a company to give these employees a certain amount of time to consider severance agreements, advise them to consult an attorney, and take other special steps.  The ADEA also requires extra severance in return for signing a waiver.

Especially during these risky times of employment-related lawsuits, providing severance to a departing employee can be a challenging balance of both an employer’s act of kindness and a necessary business decision.

Comments

  1. Practically Giddy,You say you can’t wait for New Century to go out of business. Why are they slimy emepyoels? You realize that the loans that they wrote only existed because an investor was willing to purchase them don’t you? Does that make them wrong to have given out those loans? If there were investors lining up to purchase a 580 FICO full doc transaction so be it. What about the financial planner who put people into a 401k 3 weeks ago and just lost his clients a good chunk of his investment? Or how about the guy who sells you a 50,000 Ford Expedition that loses 30% of it’s value the second you drive it off the lot is he slimy too?The real issue is not that those loans existed it’s that the consumer bit off more than he could chew. If a consumer qualifies by the given guidelines then they get the loan simple as that. Now of course if fraud is at play then obviously it’s a different story. But if they qualify then they qualify and they deserve the loan. And you might think that those programs should have never existed right? But if roughly 20% of the subprime mortgages are delinquent then 80% of subprime borrowers have been responsible, payed their mortgage, gained tons of equity, and are home owners. So when you say that realtors/lenders made money by ripping people off you are ignorant, because market prices aren’t set by agents, they are set by the consumers who believe that the property is worth it. And if you think that market prices are set by agents look in the paper at a house that has been sitting for 8 months. You’ll notice it won’t sell until the price is brought down to the market price the price that a consumer is willing to pay for it.

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