Why an Employer Might Want to Provide Severance Pay

Box of personal items on office desk that hopefully includes employer severance pay

Stuart O'Sullivan / Getty Images

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 or whatever was negotiated in the senior employee's contract.

When severance pay is dictated by an employment contract, it can amount to hundreds of thousands to millions of dollars, whatever was negotiated by the senior employee on hire. Senior employees parting ways with an employer is an expensive separation.

What Else Should Employers Consider in Offering a Severance Package?

In some instances, for regular employees and almost always for senior-level employees, a severance package might also include extended benefits and outplacement assistance. Other obligations that an employer pays the senior employee were negotiated prior to hire.

In all instances of an employment separation, the employer is required by law to offer COBRA. Regulations were established by COBRA that gives employees and their families, who lose their health benefits because of unemployment, the right to continue group health benefits provided by their group health plan. Employees may choose to continue coverage, however, employers may require the employee to pay the entire health insurance premium for health care coverage.

severance pay infographic
The Balance, 2018 

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. Time accrued would normally include 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 of the unemployment payment going forward. Check with your unemployment compensation office in your state or municipality.

For example, in Michigan, severance payments, as with any other form of remuneration, will reduce unemployment benefits in the week it is allocated or distributed.

If the severance is paid weekly over a few weeks or month's time, the unemployment compensation is reduced each week for as long as the severance pay is paid. Check with your unemployment compensation office in your state or municipality.

Negotiation and Severance Pay

A laid-off employee may try to negotiate more salary and benefits than the employer offered in his or her initial 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 that you are asking the employee to sign a release of claims in return for the severance pay, it is strongly recommended that you tell the employee that the offer is not negotiable upfront. This is recommended if you are laying off other employees, too. You will want to avoid the appearance of playing favorites or discriminating against a protected classification by chance.

Or, you can choose to negotiate severance with the employee, especially in circumstances where there is no written company policy; no past practices exist, and no promises in an employee handbook have been made. It is also much easier to negotiate when one employee is affected.

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.

Under the Older Workers Benefit Protection Act (OWBPA), which Congress passed in 1990, any terminated employee over 40 years of age who is offered a severance agreement by 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. Employers breathe a sigh of relief when the signed release of claims passes its final date for a change of heart.

State and international law will vary by where you live so this is an instance in which you will want the assistance of your employment law attorney to ensure that your actions are legal, ethical, and fair. Further, if you feel as if your plans are unkind or mean, your planned actions probably are.

Concluding Thoughts on Severance Pay

To provide severance pay to a departing employee is both a kindness on the part of the employer and it is 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.

The Bottom Line

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. Never doubt it for even a moment.

See more about severance packages.

Please note that the information provided, while authoritative, is not guaranteed for accuracy and legality. The site is read by a world-wide audience and ​employment laws and regulations vary from state to state and country to country. Please seek legal assistance, or assistance from State, Federal, or International governmental resources, to make certain your legal interpretation and decisions are correct for your location. This information is for guidance, ideas, and assistance.