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It is an unfortunate situation when you have to let an employee go or you are the employee being dismissed from the company. Either way, it is important to understand some of the implications of discharging an employee.
Severance pay, or a severance package, is pay or a combination of pay and benefits given to an employee when they are involuntarily dismissed from a company. The primary benefit associated with severance pay is a portion of the employee’s salary for a particular period of time. A common severance pay amount is two weeks of compensation.
For executives, it is common to pay the executive one month of salary for each year the individual has worked for the company. In some cases, such as with high-level executives who secure very handsome compensation packages, the severance pay can exceed what the employee would have received in salary had they remained at the company.
In this article, we will discuss how severance pay is used and some important considerations for employing severance pay. Benefits commonly associated with employee severance packages include:
• Retirement Accounts: Employers generally offer some sort of retirement plans for their employees. Defined benefit plans (such as pensions) have become extremely rare outside of government positions. Defined contribution plans (such as IRAs, 401(k)s, 403(b)s, etc.) have become extremely popular employer-sponsored plans. As part of the severance package, the employee may be able to maintain or acquire any unvested interest in a retirement account.
• Stock Options: Many employees are part of an employee stock option plan (ESOP). The ESOP allows employees to purchase an interest in company shares at fair market value. Generally, the employee does not become owner of the stock option at the time that the employer grants it to them. Instead, the stock options are subject to a designated vesting period before the employee becomes full owner of the shares. This is used to incentivize the employee to stay with the company.
If the employee leaves the company, there is generally a provision in place that causes him or her to forfeit their interest in any unvested stock options. As such, a severance package may accelerate the vesting of any unvested options at the time of the employee’s separation. The employee can exercise all of the unvested shares or sell them back to the company at the difference between the option exercise price and the current fair market value.
• COBRA: It’s required to offer COBRA by law in all instances of employee severance. As per COBRA regulations, employees are able to continue their health plans after employment separation, as are individuals under their plan. However, if employees choose to continue coverage, they may be subject by their employer to pay the entirety of their health insurance premium.
How Severance Packages Are Used
The first thing to remember is that a severance package is generally voluntary on the part of the employer. There is no federal law in place that requires an employer to pay a severance package to a fired employee. Of course, the Fair Labor Standards Act (FLSA) prohibits an employer from withholding any of an employee’s earned pay at the time of discharge. A severance package is in addition to any benefits that the employee has already accrued.
Severance packages are most commonly offered to employees who are involuntarily dismissed without the employee’s conduct or performance giving just cause for the firing. In my experience, this is most often used when the employee is laid off as part of a reduction of force or the employee receives an early retirement package.
Another common use of the severance package is when an employee is fired as a result of deficient performance or inappropriate actions. The objective of the severance package in this scenario is completely different. Generally, it is used as consideration (value) in a contract whereby the employee promises not to sue the company (for any matter related to being fired) in exchange for the severance package.
Severance pay is generally paid in one lump sum. Of course, any other benefits that are a part of the severance package are fulfilled over the stated or negotiated time period.
Considerations When Employing A Severance Package
1. If the employer offers a severance package to the employee, this is an offer to contract. If the employee refuses the offer or tries to negotiate the offer further, it effectively rejects the offer. The employee cannot later come back and accept the severance package once it is rejected.
2. Employers should indicate whether the severance offer is negotiable or not. This will avoid any dispute as to whether attempting to negotiate the severance package constitutes a new offer or rejection of an offer.
3. The severance package should include a release and waiver of all potential causes of action by the employee against the employer. This is far broader than just forgoing any claims for wrongful discharge. It can receive the employer for liability for any causes of action arising much earlier.
4. If the employee is a member of a union, you will have to work with the union concerning the discharge. If this is the case, make contact with the union early in the process. Generally, the union will act as a mediator in the situation. They will also have pre-negotiated procedures in place that must generally be followed before trying to discharge and offer severance to an employee.
5. Don’t forget about state law. State law applies in addition to the applicable federal laws. Your state (or locality) could have laws in place that allow for specific employee rights in the event of a layoff.
In the case of firing an employee and offering a severance package, there are numerous legal considerations and procedures to follow to make certain that you do not run afoul of federal or state law. It is always advisable to work with an employment attorney concerning all employment law matters. They will provide you with the guidance and assistance you need to safely navigate the employee discharge process.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
February 8, 2019 at 09:18AM
Forbes – Entrepreneurs