Severance Pay Tips for Small-Business Owners

By Barrie Gross, AllBusiness.com, 7/14/2011

Is a small business required to give severance pay (money or other benefits) to terminated employees? There are very few circumstances in which the law requires severance pay:

1. Contracts or promises: If you have a contract requiring you to pay severance, a written severance plan or severance policy, or have made some other promise (oral or written) that severance would be given, you are required to comply.

2. Practices: Even if you do not have these written policies in place, if you have a practice of giving severance pay to terminated workers, that practice could put you at risk of legal liability if you act inconsistently with it. Everything from a breach of contract claim to a claim of employment discrimination or retaliation could be filed against you.

3. WARN laws: If you do a mass layoff or close a location altogether, federal and state laws called WARN (Worker Adjustment and Retraining Notification) may apply. WARN laws are intended to protect employees and their families by giving them a prescribed period of notice (usually 60 days) before their jobs are eliminated. You are required to pay affected employees and continue their benefits through the mandatory notice period. Along with notice to the affected employees, WARN requires you to give notice to various government agencies. Penalties for failing to comply include back pay and benefits coverage for up to 60 days. Visit the Department of Labor website for details.

What Should You Include in a Severance Package?

Even if severance is not required, it can be a nice benefit to offer. Work with an attorney to develop a consistent severance package. If you treat any situation differently than the norm, to be sure you have a legitimate business basis for doing so.

Here are some things to consider including in a severance package:

Income replacement: Some amount of pay should be included.

Insurance: Depending on your business size, you may be required to offer employees the option to continue health insurance coverage under COBRA. Visit the Department of Labor website for more information.

Bonus: If the employee would have been eligible for bonus consideration had they not been terminated, consider a lump sum payment.

Email: Consider putting an agreed auto-response message on the employee's former company email address for a month or so, giving people the departing employee's new contact information.

Reason for exit: Many employees don't want an involuntary termination on their employment record. Check with your attorney to see if you can add a clause that the employee is leaving by mutual agreement.

Outplacement: Consider offering to pay for outplacement assistance.

References: You could agree in advance to refer all calls from potential new employers to a specific person who will respond only in a way you and the employee have agreed upon. Check with your attorney.

Stocks: If employees are leaving behind unvested stock options, you may or may not be able to allow the employee to continue vesting. If not, consider an alternative form of compensation.

Barrie Gross is former Vice President and Senior Corporate Counsel (Employment Law) for an international Fortune 1000 company and is a regular contributor to AllBusiness.com. She is the founder of Barrie Gross Consulting, a human resources training and consulting firm dedicated to assisting companies to manage and develop their human capital. Visit www.barriegrossconsulting.com to learn more about Barrie and the services BGC provides.

Note: The information here does not constitute legal advice and should not be relied upon as legal advice. If you have a legal issue or wish to obtain legal advice, you should consult an attorney in your area concerning your particular situation and facts. Nothing presented on this site or in this article establishes or should be construed as establishing an attorney-client or confidential relationship between you and Barrie Gross. This article is provided only as general information, which may or may not reflect the most current legal developments or be complete.

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