“Do I Have to Offer Severance Pay?”
The following article originally appeared on the BerniePortal blog, as part of its human resources (HR) best practices blog series. BerniePortal is a human resources platform developed by EO member Alex Tolbert.
Navigating the world of human resources (HR) can be overwhelming. That’s why we’ve created a blog series to answer common HR questions. To help answer each question and define best practices, we have three HR heroes with very different approaches to HR: Bythe Booke, Sam Blackheart and Peggy Prag. You may find yourself relating to one (or more) of our heroes depending on the given situation. To see full descriptions of each character, reference our first blog of the series using this link.
Last week we covered, “Do I have to offer the same health insurance benefits to everyone?” Now, let’s see what Bythe, Sam, and Peggy have to say about our next question.
Severance pay is the amount of money or benefits given to an employee as that employee leaves an employer either voluntarily or involuntarily. Severance is often offered to terminated employees in order to lighten the burden of unemployment. Employers also offer severance pay in exchange for signed release agreements from the terminated employee(s). This exchange is typically used in part to avoid the possibility of costly litigation.
Is there a law or regulation?
In most cases, severance pay is not required by law, however there are two primary exceptions. These exceptions include:
• Severance mandated by state laws: Some states require employers to offer severance pay to employees in response to something beyond an employee’s control. For instance, certain states may require employers to offer severance in the event of a facility closing or mass dismissal of employees. States with severance pay laws include: Idaho, Maine, Massachusetts and Rhode Island.
• Commitment to offer severance: An employer may also be required to pay severance to an employee if that employer either implicitly or explicitly made a prior commitment to pay severance. So what counts as a commitment? Common examples include: employee handbook clauses, employment agreements, a verbal commitment, or a history of offering severance to comparable positions.
What happens if I am not compliant?
If an employer is bound by contract or falls in the jurisdiction of state severance laws, that employer may be subject to a lawsuit and hefty fines resulting from that lawsuit.
If caught out of compliance, what’s the likelihood I’ll have to pay?
If an employer is caught out of compliance, that employer may or may not have to pay it. In order for an employer to be fined for severance non-compliance, a terminated employee would need to reviewing his/her employment contract, understand severance pay laws, pursue legal action and win a lawsuit against the employer.
Is there a risk of a lawsuit?
The risk of a lawsuit depends on the employee’s understanding of severance pay laws. Many terminated workers are unaware of their rights when it comes to severance pay, which may reduce the likelihood of a lawsuit.
While the risk of a lawsuit is not high, it is still present. An employee terminated without cause may pursue legal action.
For instance, in the case of Swanson v. The Image Bank, Inc, Swanson, a terminated employee sued her former employer, The Image Bank, for breach employment contract because The Image Bank failed to pay her the severance amount listed in her employment contract. Swanson was awarded US$450,000 in compensatory damages and US$50,000 in court costs.
In breach of contract cases such as Swanson v. The Image Bank, an employer may be found liable for:
• Expectation damages
• Liquidated Damages
• Compensatory and punitive damages
• Attorneys’ Fees
What’s the cost of compliance?
If an employer is conscientious about making severance package commitments to employees, there should be no cost of compliance. Many employers offer severance pay in order to discourage legal action. This sort of “preventative” severance can take many forms, but commonly is seen in the form of wages. The general rule of thumb for severance wages is one week worth of wages for every year worked at the company. Some employers include other severance benefits such as employee benefits, outgoing services and unemployment compensation. Learn more.
What is the risk of negative public relations?
The risk of negative public relations is medium. If an employer is sued, the likelihood of negative public relations significantly increases. The risk also increases if a former employee becomes vocal on company review sites. Negative company reviews could significantly impact a company’s brand as well as its ability to hire new employees in the future.
What is the risk of jail time?
The risk of jail time is very low.
What would our HR Heroes say is the best practice?
Bythe Booke: If an employee leaves we should always offer severance to avoid us looking bad as an employer—no matter the circumstance. Our employment contracts do not promise severance, however, we should offer a week of severance pay for every year the employee worked at our company. This way we can cover our backs and also look after our former workers. It should also mean fewer negative reviews on job sites.
Sam Blackheart: We should NEVER pay severance. If someone leaves, it is obvious we shouldn’t pay severance—after all, they made their own decision to leave. If we terminate someone it is because they were not performing, and we would have given them warnings along the way. So again, they made decisions that led to their termination. Why would we pay for nonperformance? As far as job boards—we have no way of guaranteeing that people we pay severance to won’t post negative reviews, as they are generally anonymous.
Peggy Prag: Our company is a small business with a pretty low turnover rate. I’m cautious to set a hard-and-fast rule. Let’s see how things go and make decisions as specific situations present themselves.
Alex Tolbert is a member of EO Nashville, one of EO’s largest US chapters. Alex is the founder of Bernard Health.