The Facts on Severance Pay: What's Required and What's Advisable

Severance pay has recently become a topic of discussion with a client and, as a result, I took some time to do a little research. Severance pay is extra compensation (treated like regular wages) paid to employees as a result of involuntary termination or as an enticement to voluntary termination. Since severance pay is treated as wages, it would go on the employee’s W-2 just like any other wage. If you are in a situation where you might consider offering or providing severance pay, there are a few facts that you should be aware of.

1. Severance pay is not covered under federal wage and hour (FISA) legislation but is covered in a few state statutes. For example, the State of Maine requires severance pay in the case of relocations or shutdowns. Therefore, an employer should check with their state department of labor before determining whether to offer severance pay and, if offered, how much to provide.
   
   

2. While many employers provide severance pay for managers and executive level employees, very few provide it to hourly employees. This distinction may very well be an issue addressed by state statute, so one should be careful in making this decision.
   
   

3. Severance pay is usually provided as either a matter of the employer’s general practice or a specific policy. Only infrequently is it provided on a case-by-case basis.
   
   

4. Severance pay, in many situations, would be better considered as a severance package. Within this package you might have matters related to insurance, pension benefits and severance pay. If so, the employer should keep in mind that parts of the severance package may be a requirement of statute and other parts a voluntary action on the part of the employer. The employer should maintain the ability to separate the voluntary from the required in the event that agreement cannot be reached on the whole package.
   
   

5. Frequently, companies that provide a substantial severance payment will condition the payment on the employee’s agreement not to take any legal action against the employer. In such a case, the employer should be aware that the employee has the right to refuse the severance pay and proceed with the legal action – assuming that legal action can be taken. At least one source that I found indicated that the courts are more responsive to a no-lawsuit restriction on severance pay when it is a matter specifically addressed in the company’s policies.
   
   

6. Obviously, if the employee has the right to accept or refuse the severance package then the employee also has the right to negotiate the terms. Since there is no duty to bargain, the employer can reject the employee’s efforts to negotiate the severance package or can attempt to take advantage of what might be an opportunity to reach agreement that would ultimately save the employer a substantial amount of money and be to everyone’s advantage.
   
   

7. The amount of severance pay is typically related to the number of years of service; with a cap often being placed on the total number of years for which credit will be given. For example, a one-year employee may be granted a one-week severance package, a ten-year employee might be given a ten-week package and a seventeen year employee a fifteen week severance pay benefit where the company has a fifteen week maximum benefit. Since severance pay is not a matter of law, there is no rule as to what is reasonable. Consistency in the employer’s severance pay activities would be advisable.
   
   

8. Generally speaking, you should not expect an employee to make a final decision with regard to severance pay the first time you make the offer. See it as a multi-session negotiation. For example, you might have an initial sitting with the employee in which you lay out the broad perspectives of your severance package with the conclusion that you don’t want any response from the employee at this time but would rather have the employee take it and study it for a week and come back so that you can discuss it. A week later you may sit down with the employee and work out elements such as matters related to pension, medical insurance or other things involved in this package with additional discussions over the amount of severance pay and the no-lawsuit provision. You can then schedule an additional follow-up sessions. On the other hand, the employee may be fully willing to resolve all matters during the first or second session and, if so, proceed to settlement. Always remember that time means everything in negotiations and what a person is not willing to accept at one point in time they may be fully willing to accept at some later point in time.
   
   

9. Severance pay can be given as a one-time payment or in multiple payments. Multiple payments have substantial value if there are conditions that the employee needs to meet that are part of the severance package.
   
   

10. The following is some sample severance pay policy language that you can tweak to meet your specific situation:

SEVERANCE PAY

A. An employee who has been employed for a continuous period of at least 18 months and who is involuntarily separated from employment for reasons other than misconduct or unacceptable performance and who is not eligible for an immediate annuity shall receive severance pay.

B. The amount of severance pay shall be one week’s salary for each year of the first fifteen years of service and two weeks salary for each year of service after fifteen. No severance pay will be granted for service after the twentieth year.

C. Upon separation, the employer shall pay the employee’s severance pay at monthly intervals in an amount equal to his or her basic monthly salary until such time as all severance pay that is owed has been fully paid to the employee.

After having spent a substantial amount of time researching this question, I have arrived at the conclusion that for most of my clients it is wiser not to have a specifically written severance policy than it is to have such a policy. A specific severance pay policy may unduly restrict a small employer. Also, there is nothing that prohibits the negotiations of severance pay, on a case by case basis, and conditioning those negotiations on the specific facts of the involuntary separation.

Finally, since I am self-employed, I have no one with whom I can negotiate my own severance pay. I decided to resolve this matter by setting up a personal severance pay fund in the event that I terminate myself and I am beginning to set money aside in that fund. In the event that any of you feel sorry for me, have an overwhelmingly generous spirit and would like to contribute to my personal severance pay fund, I will gladly accept such donations.