The term Severance Pay is often confused and generally misused. Severance Pay is simply money provided to an individual at the conclusion of their employment, for a variety of reasons. It could be for a lay off, a mutual decision to conclude employment, or a termination. Severance Pay could also be part of a contracted obligation on behalf of the employer, either because of an overarching Union contract, a policy of the company or an individual employment contract. There are also instances where Continuation of Pay (which could be considered severance pay) is legally mandated, such as a large scale layoff that requires advance notice to all of your employees, such as notice mandated by triggering state or federal WARN (Worker Adjustment and Retraining Notification Act). However, it is important to note, that aside from what is mentioned above, there are no laws regarding severance pay, the Fair Labor Standards Act (FLSA), which dictates most pay practices in the US, does not specify anything about paying employees any more than their earned wages.
For the purposes of this week’s blog post, we are going to talk about non-mandated Severance Pay, Severance Pay that you do not HAVE to pay, but that you may WANT to pay to an individual or group of individuals. There are several reasons why you may choose to pay a severance, even if you are not obligated to do so. This week we will focus on just two.
- Severance Payments can yield good will. A severance payment can help your employees feel better about the bad news you are delivering to them, especially when the payment is not part of an obligation or expectation. As an example, you are conducting a large scale layoff. You have released a WARN notice and satisfied the terms of the 60 day notice. As a sign of goodwill, you have decided to provide an additional 60 days of pay to impacted employees, by doing so, you are showing your employees that you care about their future and want to help them land softly in their next venture.
- Severance Payments can yield Release Agreements. A Release Agreement is a legally binding contract that will release the company from any obligation to claims made against it by the individual signing the document. The contract usually states that in exchange for the Severance Payment, which they are not otherwise entitled to, they release the company from (almost) all claims of harassment and discrimination, as well as other wrongdoing. By entering into this agreement, it absolutely does not mean that any wrongdoing actually took place, think of it more as an insurance policy against anything that the person MAY have perceived as having took place. There are a variety of reasons that a company may choose this path, in most instances, it is cheaper than fighting a frivolous lawsuit (and WAY cheaper than an actual lawsuit). Release Agreements can also spell out other obligations, such as the employee needing to return equipment or other company property (like all the names and contact information for clients). If the employee is found to still have these items, the company can stop payment and or pursue legal action, depending on the terms of the agreement. Having this is writing is an excellent way to ensure the company receives everything they want to preserve when the employee departs.
Severance Pay is complicated and not a decision your company should enter into lightly. The decision of whether to pay a severance to an individual or group of individual needs to be carefully weighed, not just against the laws and policies, but also against past practices and desired future outcomes. Partnering with a trusted source early in the process will help you navigate this complicated area with confidence.