Severance Pay

Why an Employer Might Want to Provide Severance Pay

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Severance pay is money that an employer might want to provide for an employee who is leaving their employ. Normal circumstances that can warrant severance pay include layoffs, job elimination, and mutual agreement to part ways, for whatever reason.

Severance pay usually amounts to a week or two of pay for each year the employee supplied service to the company. For executives, the severance pay may even constitute up to a month’s pay for each year of service.

For senior positions, severance pay may be dictated by an employment contract. In some instances, a severance package might also include extended benefits and outplacement assistance.

What Is an Employer Required to Pay?

No law requires an employer to pay severance pay. The Fair Labor Standards Act (FLSA) requires that an employer pays an employee whose employment has been terminated their regular wages through their completion date and for any time that the employee has accrued. This normally includes accrued vacation time, but not normally sick days.

But, severance pay is totally up to the goodwill of the employer unless the employer is obligated to pay by an employment contract or by a severance policy stated in the employee handbook or elsewhere in writing.

Because of the way ​unemployment compensation is calculated, in most states, paying the severance in a lump sum during one weekly paycheck may be in the employee’s best interests.

This reduces the unemployment compensation in the week it is paid, but enables the employee to collect the full amount going forward. If the severance is paid weekly over time, the unemployment compensation will be reduced each week.

Negotiation and Severance Pay

A laid off employee may try to negotiate more salary and benefits than the employer offered in his or her severance package.

In doing so, technically, the departing employee has turned down the employer’s offer. This does legally allow the employer to renege on the offer and pay no severance.

But, assuming you are asking the employee to sign a ​release of claims in return for the severance pay, I recommend you either tell the employee that the offer is not negotiable which is recommended if you are laying off other employees, too.

Or, you can negotiate, especially in circumstances where there is no written company policy; no past practices exist, and no promises in an employee handbook have been made.

Require a Release From All Claims in Return for Severance Pay

In return for severance pay, you should require that the employee signs ​a release that frees you from all potential lawsuits in the future. Without severance pay, there is no reason for an employee to sign and release you from all claims. Obtaining the release is important in a world in which anyone can sue you at any time for any reason – or no reason at all.​

Remember to obtain a separate release from employees who are over age 40 that includes a release from age discrimination suits. Adhere to the timeline required in your state and country, too.

In Michigan, as an example, the employee has 21 days to decide whether to sign the release and accept the severance pay. Once signed, the employee then has an additional seven days during which he or she can renege.

Concluding Thoughts on Severance Pay

To provide severance pay to a departing employee is both a kindness on the part of the employer and a legal necessity in this era of lawsuits. The departing employee receives pay that will supplement his or her unemployment compensation and cushion his or her standard of living while job searching.

Since many times a person's employment is terminated through circumstances external to their work, the provision of severance pay is a positive and supportive gesture. The payment of severance pay is also viewed positively by the employees who remain who judge their employer by his or her actions. Yes, you know that they are watching.

Disclaimer: Susan Heathfield makes every effort to offer accurate, common-sense, ethical Human Resources management, employer, and workplace advice both on this website, and linked to from this website, but she is not an attorney, and the content on the site, while authoritative, is not guaranteed for accuracy and legality, and is not to be construed as legal advice.

The site has a world-wide audience and employment laws and regulations vary from state to state and country to country, so the site cannot be definitive on all of them for your workplace. When in doubt, always seek legal counsel or assistance from State, Federal, or International governmental resources, to make certain your legal interpretation and decisions are correct. The information on this site is for guidance, ideas, and assistance only.

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