In 2020, when the Coronavirus pandemic was on peak, the economy and the unemployment rate hit a new low with mass layoffs. Even in normal times, a layoff or a termination is a hard pill to swallow for all employees. Layoffs during such trying times are even more stressful and overwhelming. When the subject of layoffs emerged, the issue of fair severance pay came up as well.
Companies may or may not choose to pay their employees with severance pay. But, offering severance pay comes with considerations and compliances to follow.
If your company does not have a severance pay policy yet, read along as I tell you how to build a severance pay plan from scratch.
But first, you must know what it is all about.
What is a Severance Pay?
Severance pay is a lump sum payment given to the employees who get terminated involuntarily. An example of this is when an organization is laying off a huge number of employees either for economic hardship or downsizing.
For full-time employees, severance pay is typically calculated as the number of years they have worked at the company multiplied by one or two weeks of standard pay. It can be extended upto four weeks of pay on the employee’s request, depending on their circumstances and relationship with the employer.
A severance package includes a sum of money, continuation of insurance benefits, unused vacation time or sick days, stock options, assistance in pension plans and finding a new job, etc.
According to the Fair Labor Standards Act (FLSA), it is not mandatory to pay a severance payment to the departing employees. But, usually, employers extend the offer of severance package as a gesture of goodwill and competitive advantage.
However, every employee is not entitled to a severance package at the time of separation. It is usually given to the long-term employees for their years of service and contribution to the company. In some cases, companies decide to offer severance pay who have been fired for a cause or are leaving voluntarily.
Similarly, companies are not legally entitled to offer severance money if they give prior notice of 60 days or more. In failure to do so, the organization must provide severance pay or continue the payment for the terminated employees for upto 60 days.
"You want to put yourself in the best possible position to have certainty about what you owe an employee."
– Jodi Gallagher Healy
5 Steps to Create a Successful Severance Pay Plan
1. Know Your Liabilities
Awareness of all the regulatory compliance is of utmost importance before you start planning your severance pay policy. You must consider the administrative and state/territory laws while you frame a severance pay policy.
Every state law might have different rules when an employee gets terminated involuntarily. It also differs according to the types of employees. For example, severance payment may be mandatory for all educational or public employees in some states.
There have also been many cases when employees sue their employers, claiming that they have been wrongfully terminated. They can sue on the grounds of discrimination, equal employment opportunity, and other similar claims.
Consult a lawyer if you need so. Make sure you follow all the laws governing your state's employment policy if you don't want an employee filing a lawsuit against you.
2. Analyze the Eligibility and Coverage
Every employee is not entitled to a severance package on termination. It depends on the state laws and their years of service in the organization. Employers choose to offer severance pay to their long-term employees, especially those in the middle to top management. It is a way of thanking them for their years of service and contribution.
The severance package does not have to be equal for all the terminated employees. It depends on the length of the tenure, family status, employment contract, and financial solvency. For example, suppose some employees are about to hit their retirement stage. In that case, you should consider supporting them with a retirement plan as well.
Now, suppose an employee served you for a short period. Let’s say a year or even less than that. In this case, you may or may not choose to offer severance pay. Even if you do, obviously it should not be the same amount you offered to your long-term employees.
The motive is to be empathetic and considerate when somebody loses a job.
3. Prepare the Severance Agreement
A severance agreement is a legal document stating the terms and conditions in which the employee terminated. It is also called a "legal consideration" to release the employee’s liability with the company. It is best to discuss this with your lawyer or legal team to ensure you've covered all the bases.
Losing a job is an unpleasant thing to experience. Some people can decide to turn against their employers too. Thus, it is crucial to lay out all the communications in writing. The primary purpose of a severance agreement is to avoid any future lawsuit from the departing employees and make a fuss-free exit.
Some of the key highlights to not miss out on the severance agreement are:
- The circumstances in which the employee was let go.
- Conditions for which severance pay will be granted.
- Amount of severance pay or the contents of the complete severance package.
- Non-disclosure agreement of the company’s privacy and maintaining confidentiality to the competitors.
- The employer has the right to alter or terminate the severance agreement at its will.
In most cases, employees receive 21 days to sign the agreement. After signing, they have seven days to revoke the offer. You can decide to keep it the same or change it according to your company policies or the employee.
4. Finalize the Severance Pay Package
After considering all the aspects, you should now get a fair idea about what and how much to include in a severance package to call it a fair share.
Along with the severance amount, here are some of the other benefits that you can provide:
- Health care benefits: Some employers choose to continue the health insurance coverage, disability benefits, and other health care benefits of the terminated employees.
- Recommendation letters: This may sound very little, but it can be of great help to someone who is in need of a job.
- Outplacement services: A job hunt is a stressful process. To ease it out, you can assist in outplacement services. It includes career counseling, resume building, and many more. It will definitely build up the goodwill of your company and shows the employee that you care.
- Unused vacation time: You can also compensate for unused vacation time or sick leaves.
- Retirement options: You can choose to assist with retirement plans and stock options.
Other than the above, some employers even let their employees keep the office resources like laptops, printers, etc., as an extended benefit.
Also, expect a negotiation from the employee. You must be prepared to reason out your offer and leave room for the negotiable areas.
5. Notify the Employee/Employees
After everything is ready, decide on the right time to schedule a meeting with the employee/employees. It is best to discuss such legal matters in person. Still, considering the WFH scenario, you are left with no choice but to do it remotely.
Be ready to answer any questions that pop up. Make sure your communication is clear, accurate and your employees understand all the terms of the agreement. Offer assistance in educating them with the unemployment benefits of the state department of labor and the likes.
Summing it up
Although it is not mandatory to offer a severance package to the employees, letting someone go is always painful and challenging for both parties.
Let’s boil it down to two main reasons why having a severance pay plan beforehand is a smart thing. Firstly, it will help you gain decent goodwill and leave no signs of bitterness from the employees. And most importantly, you can have peace of mind about not getting a surprise legal notice in your hands from one of your employees.