What You Need to Know about Severance Packages

Business owners agree that people are the lifeline of a company. The people you hire can make or break your business. Yet as an employer, it is essential to recognize that things change. There are instances when you may have to terminate an employee. Developing a severance package is one effective strategy for dealing with exiting employees.

A severance package provides pay and sometimes benefits to a departing employee. There are a few reasons why you may want to consider offering severance packages. First, by giving a severance package, you are helping ease the transition away from the company by providing additional pay to the employee. Second, implementing a severance package may protect the company from litigation: Severance pay agreements often include a release of potential claims that may exist. These agreements can also include nondisparagement provisions by which exiting employees agree not to speak negatively about your company.

If you are considering offering severance packages, here are several things that you should keep in mind:

1. Eligibility

When crafting a severance plan, it is vital to think about which employees will be eligible for the package. Some business owners limit severance packages to full-time employees or executive employees. If you are involved in a collective bargaining agreement, the agreement may require that you provide severance packages.

2. Design structure

In designing your severance plan, consider what you would like your severance package to include. Some companies offer a lump sum, whereas others provide a few additional payments. Other companies choose to continue to provide benefits for a designated period. Another design element to consider is how your company will determine how much to pay. Some businesses have developed a severance package that provides one or two weeks’ pay for every year an employee has worked with the company. Because severance packages are rarely required by law, there is flexibility regarding how to construct them.

3. Local and federal laws

As you create a severance package, it is important to know whether your practices are covered by state or federal law. For example, when a company participates in a mass layoff, the layoff may trigger provisions under the Worker Adjustment and Retraining Notification (WARN) Act. Under the WARN Act, if you are an employer with one hundred or more employees and fail to provide the required sixty days’ notice to employees before closing a plant or conducting a mass layoff, you must pay the employees severance wages for up to sixty days. Some states impose additional requirements regarding severance pay in similar circumstances. Other laws require notice and revocation periods if a release is included, and if the payout is large to a high ranking or specified employee, there can be some additional tax issues to consider. As a result, it is essential to carefully consider how these laws will impact your severance package.

4. Company culture

If your company is creating a severance package, ensure that it is congruent with your overall company culture; even if employee termination is involved and a release is incorporated, the company can maintain its moral and ethical standards. Failure to do so erodes trust, generates negative public opinion, and could, in extreme instances, be used against the company if it is accused of pursuing overly broad waivers.

We Are Here to Help

Determining how to structure your severance package can be complicated as you try to balance business objectives with federal and state requirements and company culture. You do not have to do this by yourself, however. Please schedule an appointment with a trusted attorney from our firm. We will help you craft a severance package that protects your business and honors your company’s standards.