I get occasional calls from clients asking me about severance pay. What is required? What is customary? Should there be a release or not? Of course the simple answers are nothing, nothing and maybe. Straight forward enough for you? Ok, I will provide a little more detail by clearing up some myths about severance pay.
Myth #1 Companies must provide severance pay to employees they terminate.
Many of you know the answer to this question is “no” but many employees don’t know that. There is nothing in the Fair Labor Standards Act that requires severance pay. States for the most part don’t require severance pay either, even California. Maine requires severance if you relocate or close a facility. This is somewhat akin to provisions of the WARN Act, but it covers more employers than might be covered by WARN.
There are a couple of exceptions to this rule however. First, if there is a contract that specifically provides for severance, then naturally you have to abide by the contract. Secondly, if there is a company policy that provides for severance then typically you must abide by your own policy. (Naturally circumstances may necessitate you altering this policy so I hope you have your basis covered there by stating that management has that right.)Thirdly, if you have set a precedent that is well established and well known then not following that precedent may cause you some difficulty.
Myth #2 The common practice is one week for every year of service.
There is no real common amount. There are a number of factors that go into determining what is paid, if anything. You have to look at how many people are involved; what are the levels of positions; what are the economic conditions and what can you afford; what has been done before; and what are the circumstances of the termination(s). In group situations you want to do some “costing” to determine what various options are going to cost you before you make a decision. I have been in a situation where in one cut back 20 people were let go. One of them was my secretary. She and I had started the same day and we had been with the company 1.5 years. She and the other 19 were given 4 months of severance. Two months later 200 people were cut, of which I was one. I got 4 weeks of severance. I have seen situations where people get a year or more of severance, but I have also seen situations where no severance was given at all. So there is no “common” in severance.
Myth #3 Does everyone getting a severance need to sign a release.
The answer to that is “not necessarily.” A release, or waiver, may often protect a company, by ensuring through a contractual agreement that an employee will not sue the company. However, such a waiver may not be necessary and may actually raise issues where no issues existed. As attorney Richard Meneghello, of Fisher & Philips says “Many times, if the employment relationship is rocky, and the employee is fearful, and possibly litigious, offering them a severance agreement could be a bad step. The employee might start to think that “where there’s smoke, there’s fire,” and begin believing a conspiracy theory exists where you must be trying to hide something by buying them off. Sometimes we recommend that you simply terminate the employee and cross your fingers, for fear that handing them a severance agreement will plant ideas in their head that you must be covering up something.” So you need to decide whether the employee or employees you are terminating pose a risk.
Another factor that goes into severance determination is the age of the worker. The Older Worker Benefits Protection Act has severance requirements that must be adhered to if severance is being offered. But that is a post for another day.