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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 bases 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.
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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. The prime requirement is that the worker signed the release “knowingly and voluntarily.” The OWBPA lists seven factors that must be satisfied for a waiver of age discrimination claims to be considered “knowing and voluntary.” These include:
- A waiver must be written in a manner that can be clearly understood.
- A waiver must specifically refer to rights or claims arising under the ADEA.
- A waiver must advise the employee in writing to consult an attorney before accepting the agreement.
- A waiver must provide the employee with at least 21 days to consider the offer.
- A waiver must give an employee seven days to revoke his or her signature.
- A waiver must not include rights and claims that may arise after the date on which the waiver is executed.
- A waiver must be supported by consideration in addition to that to which the employee already is entitled. In other words this means you cannot have an employee sign the waiver just to get their paycheck. There must be a severance package.
For further information you can read Understanding Waivers of Discrimination Claims in Employee Severance Agreements published by the EEOC.
If you have multiple employees being terminated then the rules change slightly and additional time has to be given to older employees. By the way remember “older worker” is anyone aged 40 or older.
Severance is a taxable event for the employee so make sure that taxes are withheld at the appropriate rate. You may want to make that clear in the agreement. Additionally, severance paid out over a period of time may be taxed as nonqualified deferred compensation. This may have tax consequences to both the employee and the employer. So be sure to check with a tax attorney if you are considering a payment schedule.
As a closing note, one thing I learned recently is that severance agreements are made null and void by a bankruptcy filing. Such an action will make the employee feel used and abused and may prompt them to sue you if they feel they have been discriminated against in the process.