Employers: Severance package and pay mistakes to avoid

While offering a severance package of benefits and pay to employees who leave your business is not mandatory, it is something many employers consider.

Severance (or separation) packages are often used when an employer must implement a reduction in force and invite employees to voluntarily leave in exchange for a package.   Such programs may qualify as an ERISA Welfare Plan and need to meet specific requirements in terms of notice to eligible employees and description of benefits.

A more common use of severance packages is with the departure of an individual employee.  The departure may be voluntary or involuntary.  The package may be used as a reward to a deserving employee or as a risk management tool, or both.

When used as a risk management tool, the employer has typically determined that it would like to minimize or eliminate the risk that the departing employee will bring a claim against the company.  Perhaps the circumstances of the termination are less than ideal.  Perhaps the employee is disgruntled and has signaled an interest in suing the company. Perhaps the employer wants to use the severance agreement as a reminder that the employee must adhere to obligations to maintain confidential trade secret and/or proprietary information.  Whatever the reason, the severance package can serve to pay the employee an agreed upon amount of money in exchange for a general release of all claims.

Employers are not required to have a severance policy in place before utilizing the severance package tool.  So long as the employer is not discriminating in its use of the severance package based on a protected status, the employer can elect when to use a severance package.  Of course, if the employer does have a severance package policy in place, it should follow the policy.

Create a Written Agreement

If you are going to offer a severance package, be sure to memorialize the terms in writing. If you promise something in a severance agreement, failing to deliver on that promise can trigger legal disputes and financial penalties.

In other words, if you offer to continue to pay benefits, be sure to do that. And be sure to pay the severance in full and per a legally valid agreement. If you do not do this, an employee could have grounds to file a breach of contract claim.

The terms of the severance agreement should be reviewed by an attorney.  Obtaining an enforceable general release of all claims requires that certain language be set forth in the agreement.  Some claims are not waived unless the agreement uses language required by law, e.g. an age discrimination claim.

On the flip side, if the agreement attempts to overreach and seek a waiver of claims that cannot be included in the agreement, some or all of the agreement may be deemed unenforceable, e.g. attempting to seek waivers of unemployment insurance and workers’ compensation clams.

Overextending Yourself

Neither state or federal law set standards as to the amount of severance pay and/or benefits that should be offered or paid.  That amount will likely vary depending on the circumstances. The range can be significant, but there is no requirement that large amounts be paid or that the employer use any specific formula for determining the amount of severance pay.

Severance packages can show employees that you value them, and they can be a bargaining chip when attracting high-value workers. Some elements of a severance package can include:

  • Periodic or lump-sum payments for salary continuation
  • Paying COBRA premiums
  • Loan forgiveness
  • Promises of positive references
  • Assistance with finding them new employment

Employees may welcome all these benefits, but offering them all to every employee can be too expensive and unrealistic. And overpromising things can put you in a thorny position should the time come to carry out these promises.