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Should your company offer severance pay?

It comes with the territory. If you’re fortunate enough to hold a management position, then you might be unfortunate enough to understand the difficulty of telling an employee that they’re being laid off.

There’s no easy or pleasant way to have that conversation, however, it’s one of the prices you pay for being entrusted with making tough decisions for the benefit of your company.

When you’re faced with the reality that layoffs are necessary, your organization has a decision to make, regardless of whether you’re letting go of one person or hundreds of employees:

Should you offer severance pay?

To offer or not offer severance pay

Severance pay is usually offered to assist with the transition from being employed to unemployed. The upside of a severance package is that it affords your organization some legal protections.

  • When an employee accepts a severance package, they usually do so in exchange for signing a separation agreement.
  • This agreement makes it unlikely – but not impossible – that the employee will later file a lawsuit or complaint as to why they were let go.
  • Employees still have the right to file a complaint, but the separation agreement generally prevents them from earning any monetary benefit.
  • States have varying standards for NDAs or confidentiality as they relate to severance-related contracts. Work with your legal representatives to ensure your severance agreement language is in full compliance with the states where you operate and where your employees work.

The reason to not offer severance pay is usually financial.

  • If you must let many employees go, providing severance to all of them is a significant financial obligation. Looking at your balance sheet, you might decide it’s simply not feasible.
  • If you’re laying off only one or two employees, a severance package is a small price to pay for a release of legal claims.

A method to the madness

Ultimately each company must make its own decision regarding severance pay.

If you offer severance:

  1. Present the employee with the final agreement on their final day of work or later. You may present a draft document prior to the final day of work.
  2. Explain the agreement. Communicate that it’s their decision whether to sign – with no pressure or recommendations.
  3. Another option is to send the severance agreement via courier to their home after the layoff meeting. By allowing them the opportunity to review the document alone, you give yourself extra legal protection against a future allegation that the laid-off worker might have been coerced into signing.

What should you offer and when

In organizations that are struggling, it may be announced in advance that layoffs are coming.

Your employees are professionals, and while this news is hard to swallow, it helps cushion the blow for those who might be impacted. It also gives employees a chance to dust off their resumes and look for other opportunities. Be careful though, you may lose your best employees while the mediocre remain.

You might choose to let specific employees know they will be among those laid off, and at that time, you may also inform them that the company will be offering severance packages. You can even go into some of the details and offer them a watermarked version of the severance agreement. Just remember not to provide the actual contract until their final day.

A fair severance agreement should include at least two weeks salary, and may also include:

  • Additional money based on years of service
  • A reimbursement to help offset the cost of health insurance coverage continuation or COBRA stipend
  • Outplacement counseling and/or training

If an employee under 40 years old signs the severance agreement, he/she can be paid immediately. Federal law states that an employee who is 40 or older has seven calendar days after signing a severance contract to rescind that signature.

Commitment to clarity

Explain that their severance check will be taxed at the supplemental rate. That means that if they’re getting four weeks of salary, for example, they will receive less money than they would when they received four weeks of paychecks.

As part of the severance process, establish a point of contact for additional questions the employee might have after the fact.

Past, present and future

The way you handle layoffs and severance at any given time should be consistent. If possible, consult with members of your team who have helped guide your organization through layoffs in the past and learn from those experiences.

Also keep in mind that employees who remain with the company may be going through a difficult emotional experience that could include guilt over their departed co-workers. They might take some solace in knowing they work for a company that treats its employees fairly, even in challenging situations.

Word travels fast these days, and if you decide to not offer severance payment or packages, that might impact your ability to recruit talent in the future. Conversely, prospective employees whose research reveals that your company offered a fair agreement to workers who were laid off might help them decide to join your organization in the future.

The public relations value of offering severance also can extend to companies who are beginning the process of going public and looking to attract investors and positive media prior to an initial public offering.

Severance pay is just one of many benefits a company can utilize to attract, retain and, in this case, terminate talent in amicable terms. If you’d like to learn more about the various benefits you can offer your employees, download and read our complimentary magazine: The Insperity guide to employee benefits.