Severance pay is a sum of money an employer gives to an employee who's been "severed" from employment with the company. Normally, severance is based on length of service.
When is severance legally required?
The Fair Labor Standards Act (FLSA) does not require employers to pay severance, regarding it as a matter between the employer and employee. However, severance may be legally required in two cases.
First, in a few states employers undergoing plant closings or large-scale layoffs must pay severance to impacted employees for a limited time after the termination.
Second, if you promised your employees — or led them to believe — that they will receive severance if terminated, then you must follow through. An expressed or implied promise may be substantiated by:
- A written employment contract that says severance will be paid.
- An employee handbook or personnel policies suggesting to employees that they will receive severance.
- A history of paying severance to employees in the same position as the terminated employee.
- A substantiated verbal promise of severance to the employee.
Should you voluntarily offer severance?
A 2019 survey by RiseSmart reveals a 6% increase in the number of employers offering severance since 2017. Based on this study, the following employees were eligible for severance:
- Officers and executives, 41%.
- Managers and professionals, 40%.
- Administrative/clerical, 19%.
With more employers giving severance, you may want to follow suit to maintain your competitive position. Furthermore, severance can help keep remaining employees on board; they might stay if they know that they will be compensated if they're let go. Severance can also ease the blow of involuntary terminations and help departing employees view your company in a favorable light.
Should you give fired employees severance?
Severance in this case is highly discretional. Some employers give severance to fired employees as a way of minimizing discrimination or wrongful termination lawsuits. And some offer severance to all fired employees, except when gross misconduct is involved. The severance payment is frequently conditioned upon the employee’s signing a non-disparagement agreement.
What should a severance package include?
If the state requires severance, then employees should be compensated accordingly. For example, in New Jersey, severance for a mass layoff must equal one week of pay for each year of employment.
Otherwise, there are no hard-and-fast rules for what a severance package should entail. Usually, employers give one or two weeks of salary for each year of service. The package may also include:
- Benefits, such as continuation of health, life, or disability insurance for a short period of time following termination. Note that this is not the same as COBRA health coverage, which requires terminated employees to foot the bill.
- Miscellaneous benefits, such as outplacement services, references/recommendations, letting the employee keep company equipment (such as computer or cell phone), or forgiving a loan or pay advance.
Ultimately, your severance policies should be thoughtful, legal, and aligned with your business strategy.