Severance Pay Basics
Calculating severance has many factors that contribute to its complexity.
It’s common for employers to offer severance pay during workforce reductions—i.e. reductions in force (RIFs) or layoffs. Severance packages, which often include pay and other benefits, serve to alleviate some of the stress associated with job loss. Providing severance is often in an employer’s best interest, too, as it can mitigate legal risk, preserve morale, and maintain brand reputation.
This article provides an introductory look at severance pay.
What is severance pay?
Before we discuss its intricacies, it’s important to have a basic understanding of what severance is. Severance pay typically includes compensation and benefits to help employees transition out of their role within a company. Employers most often use severance in situations of involuntary termination, such as a reduction in force (RIF) or another scenario resulting in significant workforce changes. Severance may be offered as part of an early retirement program or in other unique situations where parting ways makes the most sense for the employer and employee.
A key condition of severance pay is that “consideration” (i.e. something of value) is offered in exchange for a waiver of claims. In other words, an employee who accepts the severance package typically waives certain rights to pursue legal action against the employer, as limited by federal, state, and/or local law. Common severance policy language may also include non-disparagement, confidentiality, or non-solicitation clauses.
What is included in a typical severance package?
Severance packages can vary widely from organization to organization. However, some of the most common severance pay practices include:
Pay based on tenure: Companies generally offer one to two weeks of severance pay for each year of employment. Employees with the greatest tenure often receive the most favorable rates.
Health insurance continuation: Many employers offer a health insurance continuation option as part of their severance package. Businesses with 20 or more employees may be required to provide coverage to comply with the Consolidated Omnibus Budget Reconciliation Act (COBRA). Employers may choose to supplement the cost of COBRA for a limited time.
Outplacement services: To ease the transition and help employers land new jobs, many companies offer outplacement services as part of the severance package. Outplacement services may include resume writing, interview coaching, and networking opportunities.
Additional benefits: Other common severance package offerings include dental, vision, or life insurance continuation; commission/bonus payouts; accelerated vesting of retirement benefits and/or stock options; payout for unused vacation time (keeping state and local laws in mind); and more.
Organizations can (and should) think creatively about their severance offerings—company discounts, access to the corporate gym, etc. These gestures of goodwill can help brands maintain a positive image, even during layoffs.
Why do companies provide severance?
Employers should consider providing severance for a number of reasons. For one, it’s a compassionate gesture during a difficult time for employees. Companies often receive negative press when layoffs are announced, so providing severance can help maintain brand reputation during challenging times. Not only does this benefit the impacted employees by providing transitional support; it’s also looked upon favorably by exiting employees, customers, investors, and even future talent. This is especially important in today’s workforce, where it’s common for employees to be rehired (i.e. boomerang employees).
As mentioned previously, severance also helps companies reduce legal risk. When employees accept severance packages, they typically waive certain rights to future litigation, including wrongful termination and discrimination lawsuits. Severance agreements also help maintain proprietary business information through various confidentiality and non-solicitation clauses.
Though severance may seem like a big expenditure, the cost of not providing severance can be significant. In addition to avoiding legal fees, severance can help organizations save money by preserving the company’s reputation, leading to improved talent management and brand success.
When do companies offer severance?
As mentioned previously, severance is typically provided in cases of involuntary layoffs. When severance is offered is typically up to a company’s discretion. Some companies choose to publish their severance policies in an existing manual or handbook, while others only present information regarding severance on a case-by-case basis. Developing severance policies in advance is preferable because it enables companies to be thoughtful about policy decisions and administration.
Is severance pay mandatory?
There are no federal U.S. laws that mandate severance pay. However, the federal WARN Act requires transitional pay in certain situations of plant closings and mass layoffs. The New Jersey WARN Act takes it a step further, mandating severance pay for laid-off employees.
Companies must be careful to adhere to any corporate severances policies they have established. It’s also important to be mindful of the terms outlined in any employment contract or collective bargaining agreement (CBA).
Does Onwards HR help companies provide severance?
Absolutely! Onwards HR’s configurable automation tools enable employers to provide severance packages that align with corporate policies and employment laws. Plus, our built-in severance calculator helps ensure payments are accurate and that rules are consistently applied.
Learn more about Onwards HR’s Severance Automation capabilities.
