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The Complete Payroll Blog

The Difference Between a Severance Package and a Severance Agreement

Posted by Complete Payroll | Feb 14, 2017 9:00:42 AM

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Often lumped together, severance packages and severance agreements have important differences.  A severance package refers to an employer’s offer of added money and/or benefits to a terminated employee.  A severance (or separation) agreement refers to a written agreement in which the departing employee agrees to certain promises made to the employer.  The following information will identify the main types of severance options available to assist the employer in determining what separation arrangement may be most prudent for the business.

Severance Package

While no law requires an employer to pay any severance beyond the employee's regular compensation, the following represents commonly considered items:

  • Monetary Pay.  Many employers pay either a lump sum or a distribution over a number of weeks.  Depending on the size of the business, one common formula is to offer one or two weeks of salary for every service year of employment usually with a minimum of four to eight week's worth of equivalent pay.
  • Benefits Coverage.  Some employers completely or partially pay for continuation of health (i.e. federal COBRA or state mini-COBRA), life, and / or disability insurance coverage for a certain time period.  Other types of benefits coverage to consider extending include an employee assistance program (EAP) which may offer professional grievance counseling support.
  • Unemployment Insurance.  An employee may claim unemployment compensation for which the employer may agree not to contest.  If the employer agrees not to challenge the claim, the likelihood of the employee receiving the benefits increases.
  • Outplacement Services.  An employer may offer outplacement support to help an employee find a new job.  By providing job search skills and career coaching services, this resource can help the employee transition away from your company. 
  • Non-traditional Options.  On a case-by-case basis, you may decide on additional items as part of the package such as having the employee keep company equipment (i.e. cell phone, laptop, software tools, etc.), waiving pay advances or negative vacation, sick, PTO balances, and/or extending company product or service discounts.

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Severance Agreement

A severance agreement is not a mandatory business requirement.  Depending on the nature of the business and the market landscape, however, you may consider specific conditions as part of the employment separation.  While usually intended to release the employer from certain claims, such written agreements may include:

  • Non-compete. An employee promises not to compete with his or her employer for a specified time in a particular place.
  • Non-disclosure. This promise restricts the employee’s use and disclosure of items such as client lists, pricing, and other confidential or proprietary information.
  • Non-disparagement. Under this provision, the employee shall not discredit, defame, or slander the employer.
  • Non-solicitation. This “restrictive covenant” restricts the employee from soliciting the employer's customers and/or hiring its employees away from their current positions.

Severance Determination

As a general rule, an employer may be required to provide severance compensation in two situations: (1) obligations under federal and state Worker Adjustment Retraining & Notification (WARN) Acts and (2) certain verbal or written contracts or agreements leading the employee to reasonably believe that he or she would be paid.

Note: The WARN Act requires employers with 100 or more employees to give employees 60 days advance notice of plant closings and mass layoffs.  If an employer gives at least 60 days advance notice, no severance pay is required.  If the employer fails to give the required notice, the law requires the employer to pay its employees for up to 60 days.

Regardless, employers do have flexibility in setting the eligibility criteria for any severance package. Different employees can be included, and different formulas can apply to different job groups.  On the other hand, since employers still need to demonstrate some degree of fairness, employees in protected classes should not be discriminated against.

Severance Policy

One common question employers have is whether or not to establish a written policy.  In general, having a formalized severance policy in writing makes more sense for large companies more likely to be subject to the WARN Acts.  On the other hand, an unwritten informal, individualized approach tends to work better for small businesses and companies with infrequent departures.

For most severance policies, useful statements may include:

  • “Employees who sign an agreement releasing the employer of employment liability agree to do so on an informed and voluntary basis.”
  • “The purchase of the business by another company will not require the payment of severance, unless employees are actually laid off.”
  • “The company reserves the right to alter or terminate its severance policy.”

Note: The Age Discrimination in Employment Act (ADEA) protects employees age 40 or older and requires a company to give these employees a certain amount of time to consider severance agreements, advise them to consult an attorney, and take other special steps.  The ADEA also requires extra severance in return for signing a waiver.

Especially during these risky times of employment-related lawsuits, providing severance to a departing employee can be a challenging balance of both an employer’s act of kindness and a necessary business decision.

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For more information and insights into the laws, best practices and complexities around terminating employees, check out our resource page, A Complete Guide to Employee Terminations. It's an all-in-one page that includes thorough insights, instructions and plenty of links to other helpful resources.

Additionally, here are some other articles that focus on the difficult subject of terminating employees:

Topics: Employees, Human resources

Ready to terminate your current payroll or HCM situation?

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