By: Helios on October 17th, 2013

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What to Consider When Creating or Updating a Severance Policy

Risk Management | Best Practices | Employee Relations

There may be various reasons why organizations update or create a formalized severance plan. When referring to a severance plan, we mean a payment provided to an employee, or a group of employees, that are involuntarily terminated due to a reduction in force/downsizing, change in company direction, job elimination, or termination due to unsatisfactory performance. Typically, the top five reasons for creating or updating a severance policy are:

  1. You already have a written contract with an individual employee(s) stating severance would be paid;
  2. You promised employees they would receive severance as documented in an employee handbook or personnel policies;
  3. There is a past practice of paying severance to other employees;
  4. You have provided an oral promise to an employee that severance would be paid; and/or
  5. You are required to offer some sort of severance based upon local or state laws.

The considerations below will help your organization determine a thorough, consistent and organized way to assist employees in the off-boarding process.

The first area you want to consider when implementing or revising your severance policy is to review your organizational and benefit strategies and resources to determine how a severance policy supports your organizational goals. Reviewing your organizational and benefit strategies allows you to put parameters around the severance policy your organization wants to create. If an organizational goal is to provide a rich and rewarding experience for employees, you may want to create a policy that is very generous to outgoing workers. On the other hand, if your organization and benefit strategies pay market rates, you may want to look into creating a policy that is in line with your competition or other employers in the geographic area in which you compete. After you have completed this stage, you should be able to answer why the policy is being put into place and what it will mean to any employee leaving the organization.

Define the Plan
After you have reviewed and defined your reasons for a severance policy, you will want to review the following:

  1. Research best practices for providing severance by looking at comparable companies in your industry or geographic region.
  2. Work with your finance and accounting team to determine what your organization can afford.
  3. Who will the policy apply to — all employees or a certain segment?
  4. How much severance you would like to offer employees — is it for all employees or just employees at a certain level?
  5. What does your current or future employee population look like so you can determine if a general separation and release agreement is needed for both employees under or over 40 years of age to remain compliant with the Older Workers Benefit and Protection Act (OWBPA).

Communicating the Plan
Once the plan has been defined and created, your organization will need to determine how it will communicate this policy to your employee population. There are several distribution options available to you, but only two we recommend. Overall options include adding the policy to an existing employee handbook or policies manual; having an all hands meeting to discuss the policy and then emailing it to the entire organization impacted by a transitionary event (merger or acquisition) or explaining and providing it to employees as the situations arise.

At Helios, we recommend an in person conversation and a follow up e-mail to provide transparency during a time of high uncertainty and working individually with employees as the need arises. Providing this information in an employee handbook is not recommended because it paints an organization into a corner without understanding the long term implications of the policy. In the instance of a merger or acquisition, the new organization may have another policy that is contradictory to your old policy. This may cause more confusion, angst and liability for your organization if you publish the information instead of working with the situation and determining how you want to proceed. Again, each employer will need to determine their own level of comfort disclosing and distributing the severance policy in relation to the organizational culture.

Tracking Mechanism
Regardless of how you communicate a severance policy, your organization should determine a method for tracking severance payments. You will want to track this information for a variety of reasons, but the main reasons include: ensuring continuity in similar situations; providing updates and information to senior level managers; and ensuring information doesn't get lost over time due to faulty memories. Tracking severance can be as easy as setting up a spreadsheet in Excel.

Update Policy if Business Needs Change
Finally, after all the legwork has been done to create your policy, communicate it and then track the information, your organization may need to update the policy if business needs change. The policy should be flexible enough to allow for changes if your organization comes into a financial situation where your original policy no longer works. Reviewing this policy, along with the rest of your employee handbook or employment practices, should occur on an annual basis to ensure it is still aligned with your current business goals, objectives and culture.

Having a severance plan in place will allow your organization to proactively prepare for off-boarding employees. While you may not need a severance policy in all instances of employee separation, it is far better to plan for these types of events in advance instead of trying to create a plan or policy when the need arises.