Severance Pay: Some Helpful Guidelines for Employers

By Barrie Gross, Esq.

The term "severance pay" is often misunderstood. A few decades ago, it usually only referred to the common practice of paying all fired workers according to some pre-fixed formula, for example,

the equivalent of one week's pay for each year of service. Severance was paid regardless of why the employee was terminated or whether there was legal risk associated with the termination. And, believe it or not, the employer usually did not ask the fired employee to sign a release in exchange for severance benefits!

Today, "severance pay" still means the payment of money or other benefits to terminated employees. But the context in which it comes up can vary, and employers usually require employees to sign a release of claims in exchange for the benefits, if allowed by law.

There are very few circumstances in which the law may require that you pay severance. For example, do you have a practice of giving severance pay to terminated workers? If so, that practice can give rise to 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. Legal liability can also arise if you have a contract requiring you to pay severance, a written severance plan or severance policy, or some other promise (oral or written) that severance would be given.

WARN Laws

Another circumstance that may require you to pay a form of severance is a mass layoff or the closure a particular work location altogether. There are federal and state laws called WARN (Worker Adjustment and Retraining Notification) that may apply in those situations. WARN laws are intended to protect employees and their families in the event of layoffs of a certain size or plant closings, by giving them a prescribed period of notice (usually 60 days) before their jobs can be taken away.

The idea of WARN is that the notice period allows affected employees some time to transition, whether that is an emotional transition, or time to find another job or to learn new skills. Along with notice to the affected employees, there are also notice requirements to various government agencies. And the penalties can be expensive for employers who do not comply, including back pay and benefits coverage for up to 60 days.

Each WARN law has a specific definition of what type and size of mass layoff or plant closing requires that you give notice. They also discuss some limited exemptions from the notice requirements. But either way, WARN can act as sort of a severance program since a covered employer is required to pay affected employees and continue their benefits through the mandatory notice period.

Items to Consider Including in a Severance Package

Even where the law does not require you to pay severance, it is sometimes a good idea to consider it. Perhaps there are some legal risks you are not willing to tolerate with a particular employee's exit? Maybe you just want to buy some good will from a disgruntled employee to help them through the transition period? The bottom line is that sometimes it makes sense to offer a severance package (also called an "exit package" or "negotiated exit") in exchange for the departing employee's signature on a release of claims.

In the absence of a formal severance program or policy that applies in specifically defined situations, you'll need to decide what to include in the severance package. However you resolve it, be careful that whether and when you offer severance, and how much you offer, is done consistently to avoid additional legal problems. You always need to be able to explain a legitimate business basis for treating each situation differently. And you'll need to work with an attorney about what you are allowed to include in a release of claims and any required terms in order to make it enforceable.

Here are a few thoughts about the terms you could consider in a severance package:

• Income replacement: Whether you calculate this amount based on a pre-fixed formula, or you offer an amount you think will offset the legal risk, some amount of pay should be included.
• Insurance: If you provide employees with group insurance coverage like health and dental, consider continuing those benefits and making your usual employer contribution to the premium for some period of time after the employee's exit. Alternatively, if your written plan documents do not allow the former employee to remain a participant, consider a payment to help offset COBRA premiums.
• Bonus: If the employee would have been eligible for bonus consideration had they not been terminated, consider a lump sum payment in some amount. Be careful that the payment is not phrased as a bonus payout since they are no longer eligible. Rather, you can simply offer it as additional compensation.
• Electronics: Many employers supply employees with laptop computers. Consider allowing the employee to keep it if they bring it to work so that you can clean the hard drive of company information.
• E-Mail: Given the prevalence of e-mail as a form of business communication, many employees use the company's e-mail address for professional and personal correspondence (regardless of company policies prohibiting personal use). You can consider offering to put an agreed auto-response message on the employee's former company e-mail address so that correspondents receive an message with the departing employee's new contact information, along with directions on whom to contact at the company for business-related questions. This can sometimes be an important offer and allowing it for one month is usually well received by the departing employee.
• Reason for exit: Many employees will not want an involuntary termination on their employment record. If it is appropriate under the circumstances and you've checked with counsel about the legal implications, you can consider including a clause that the employee is leaving by mutual agreement.
• Unemployment compensation: Most terminated employees are eligible for unemployment insurance compensation if they have not engaged in serious misconduct. Many employers will try to contest unemployment benefits as a matter of course. You can consider agreeing not to contest the payment of these benefits. If you do, make sure to consult with legal counsel first, particularly in a situation where you and the employee agreed to phrase their exit by "mutual agreement."
• Outplacement: Depending on the level of employee and the position they held, you may want to consider offering to pay for outplacement assistance. With outplacement, the employee will be able to work with a trained counselor to finely tune their new job hunt. And they will be able to use the outplacement offices for administrative support as well. This can be a very valuable benefit for many employees.
• References: Terminated employees are usually concerned about what the former employer will say if you are contacted by a potential new employer. You could agree in advance to refer all such calls to a specific person who will respond only in the way that you and the employee agree. Be sure to consult with counsel about this because depending on the reason why the person is leaving, or events that may have taken place during their employment, there can be a risk of liability associated with references.
• Stocks: For publicly traded companies, many employees will be leaving behind a package of unvested stock options or restricted shares. Depending on the terms of your stock plans, you may or may not be able to allow the employee to continue vesting for some period of time after their exit. If you cannot, consider whether it's appropriate to offer an alternative payment of some lesser value to help ease the burden of that loss.
• Other: Think about other issues the employee may confront as a result of an unanticipated exit. For example, is the employee suddenly liable to repay a large amount of money for relocation expenses or tuition reimbursement? Can you forgive those payments? Always check with counsel because of regulatory and other issues associated with loan forgiveness. But you may be able to do something in this regard. By being aware of these other factors, you can craft a package that is a reasonable compromise.

One-off severance packages can be challenging and need to be customized to the individual employee. But if you work with human resources and legal counsel, you and the employee can often reap a great benefit from giving severance in exchange for a release of claims. After all, your interest and the employee's interest are in being able to move on without the emotional and financial drain associated with litigation. Where appropriate, a reasonable severance package can help both of you to get there sooner.

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Note: This article 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.