When layoffs and job eliminations occur, many companies offer severance pay. Most do so to soften the blow of an involuntary termination and to avoid future lawsuits by having the employee sign a release in exchange for the severance.
Do You Have to Pay Severance?
There are only two situations when you may be legally required to provide severance pay:
- If you live in a state that requires employers who are closing a facility or laying off a large number of workers to pay a small amount of severance.
- If your employees were led them to believe they would be paid severance because of:
- a written contract stating that severance would be paid;
- a promise of severance pay documented in an employee handbook or personnel policies;
- a history of the company paying severance to other employees in the same position;
- an oral promise to the employee that you would pay severance.
The biggest issue you might face is an employee who has done his or her homework about negotiating a severance package. Most will ask for a larger severance payout, extended health benefits or perks like keeping a company computer or smartphone.
What Do You Have to Offer in a Severance Package?
If you do offer severance, the most important rule is to be consistent. The amount of pay can vary depending on how long the employee has worked for you and the employee's job category, but you'll want treat your employees equally. If you are impartial, you're less likely to face claims of discrimination. Be sure to calculate everyone's severance pay based on the same factors.
For example, many employers pay a set amount—e.g., a week or two of salary—for every year of employment.
Other items you may want to include in your severance package include:
- Insurance Benefits - You can offer to pay for continuation of health, life, or disability insurance coverage for a period of time after an employee has been let go (although the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires you to continue healthcare coverage, it does not require you to pay for it). Some states, however, do require you to pay for a short period of continued coverage, so be sure to know your state's rules
- Uncontested unemployment compensation - After a former employee applies for unemployment benefits, you have the opportunity to contest the employee's claim. If you don't, it is much more likely that the employee will receive benefits.
- Paid outplacement services - An outplacement program is designed to help laid off employees find new jobs.
- References - You can offer to provide laid off or eliminated employees with a mutually agreeable letter of reference, but be sure to consult with your legal counsel first.
If you have any questions about this topic, feel free to call Complete Payroll anytime. As a leader in payroll services in Buffalo, Rochester and Syracuse, we can help take the burden of payroll off your plate. Call us today.