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When and Why Offer Severance Pay?

Posted on September 12, 2017
Debra KabalkinWritten by Debra Kabalkin | Email author

According to HRA-NCA, more than 50% of employers offer severance to all levels of employees (except for gross misconduct).  As HR consultants, we commonly see severance offered for the following reasons:

  1. RIF (Reduction in Force):

The most common reason for severance is when an employee is laid-off due to a position elimination. An RIF can occur due to a few reasons:

  • The company has lost government contract.
  • The company has a lack of funds.
  • The company is going through a reorganization.

Providing severance pay in these situations is viewed as an act of kindness on the part of the employer.  The severance pay supplements the employee’s unemployment compensation and provides a financial bridge while he/she is in search of a new employment opportunity.

  1. Other Involuntary Separations:

While it is not a best practice, there may be times when as a company, a decision is made to provide severance to terminating employees.  Severance should be given on a case-by-case basis to employees when the company feels they are at risk of legal action on behalf of the terminating employee.

  1. Employment Contract

There are times when an employee negotiates severance as part of a new employment agreement (contract).  In this case, regardless of why the employee leaves the company, they will need to receive the package negotiated at the time of hire.

Helios recommends companies establish general administrative guidelines on the calculation method to be used, and when to use it.   While consistent practices do not eliminate the risk of alleged discrimination, it does mitigate such risk.

Recommended Payment Amount

Typically, my experience with severance payments is the amount of severance given depends on the affected employee’s length of service.  Less typical, is to base severance on the employee’s job or pay level.  Formulas to calculate severance pay vary and according to HRA-NCA, just over half of companies offer one week of pay for each year of service and nearly 20% offer less than that.

Usually, companies give severance payments in one lump sum payment; however, some companies offer employees the option to receive severance with the regular pay schedule until severance is exhausted to lessen the tax burden on the employee and help the employee manage their money.

Continuation of Insurance Benefits

Paying for employee benefits, up to two months in some cases, is a practice used by some employers as part of the overall severance package. It is important to note, support in paying employee’s benefit premiums beyond their date of separation may be viewed by the Unemployment Office as a form of compensation, and could negatively impact the employees’ ability to collect unemployment.

Outplacement Services

Helios often recommends that companies give some consideration to providing outplacement services for employees at the time of termination.  (One of the outplacement firms we’ve had success working with is Lee Hecht Harrison.) Outplacement services help employees during their transition to a new job or a new career.  At Helios, we have seen companies offer different types of outplacement services based on either the employee’s tenure or position within the company; in other words, more senior level employees may receive a richer outplacement services package.  Some of the services employers provide are:

  • Job coaching
  • Resume writing services
  • Job search technology
  • Job Seeker support groups

Typically, the amount of time outplacement services are available to the separating employee is based on length of service, as shown below.

Release of Claims

Helios never recommends offering severance without a signed separation agreement (a general release), in which the employee, in exchange for severance pay, waives the right to almost any claim arising out of his or her employment as this may mitigate the risk of employment litigation.

It is important to note, however, if the Equal Employment Opportunity Commission (“EEOC”) or a state counterpart view, the language in the agreement as prohibitive then it will not be enforceable.  An Agreement can not discourage an employee (or former employee) from filing a charge or cooperating in an EEOC investigation of a charge.

We recommend companies have at least two severance agreement templates:

  • One for employees over 40 years old
  • One for employees under 40 years old
  • A State-specific agreement should include any additional requirements

Once your agreements have been created, they should be reviewed by legal counsel.

Separations are never easy.  Being prepared will make all the difference in the process.  The remaining employees will look to you for guidance, and it’s your job to ease them through the difficult transition.

For additional resources, I recommend reviewing the following sources:

  1. Designing and Administering Severance Pay Plans
  2. Severance and Change in Control Plans a Report by WorldatWork and Innovative Compensation & Benefits Concepts
  3. Human Resource Association of the National Capital Area (HRA-NCA): Compensation Survey Report Washington-Baltimore Metropolitan Region 2016

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