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Tag: severance pay

Who Gets Severance Pay and How Is It Paid?

October 1, 2018

The United States of America is one of the few wealthy countries that do not require an employer to offer and pay a departing employee some sort of a severance payment. Were there such a federal requirement, it would most likely be couched in the Fair Labor Standards Act (FLSA) which governs wage and hour issues in all workplaces engaged in interstate commerce. But the FLSA includes no rules that entitle an employee to severance pay. 

Instead, severance pay is a contractual arrangement. Thus, as long as no discrimination is made based on prohibited grounds, who gets severance pay and how it is paid is generally at the discretion of the parties.

When a company has a formal severance pay policy, it will include the purpose of the severance plan and conditions for paying severance. Eligibility for and the amount of pay and/or benefits will be included therein and is primarily calculated by the length of employment or service tenure. Other factors are frequently considered such as: 

  • Reason for termination of employment (often termination for cause such as poor performance or misconduct will disentitle an employee from severance pay),

  • Re-employment of the employee by the same employer or its affiliates (this frequently triggers a claw back or termination of severance benefits), among other factors

  • Class of workers, for example, salaried workers may receive severance pay, but hourly employees may not. Executives are almost always offered some form of severance pay.

  • Company succession: severance agreement may stipulate that in the event the company is sold, acquired, mergers, etc. severance will not be paid unless an employee is involuntarily terminated.

Severance pay can be paid in a lump sum, or via regular pay periods for a specified duration, this is known as salary continuation. Depending on the circumstances, one or the other payment method might be preferred, for instance, if the separation arose from hostile circumstances it would be ideal to offer a lump sum and part ways with the departing employee immediately or if there are concerns about funding a large severance payment then salary continuation would be ideal. The payment method may affect the employee’s unemployment benefits and have tax liability consequences, so this is an important consideration for both parties.

An employment attorney can assist an employee in negotiating a severance package, especially if termination of employment was involuntary due to a group reduction in force. Even if the employee was wrongfully terminated, an attorney can advise on potential grounds for a wrongful termination lawsuit before the right to sue is waived or released in a severance agreement.

Due to the consequences of accepting a severance agreement and the potential benefits of having entered into a severance agreement, it is advisable to have an experienced employment attorney review the policy prior to executing any documents.

 

8 Benefits Employer and Employee Exchange for Severance

September 24, 2018

Severance pay is a matter of agreement between an employer and an employee. It is an agreement that the employer will provide a payment and/or benefits to an employee at the termination of employment. This agreement is usually called a severance agreement or a separation agreement. In the absence of a legislative mandate, employers are incentivized to make offers of severance packages generally in exchange for valuable promises from the employee which would otherwise not be enforceable for lack of consideration. These promises usually include the following top 8:

  1. Agreement not to litigate or sue the employer

  2. Release from certain employment contract terms

  3. Release from future potential legal claims or disputes

  4. Indemnity for tax and other liabilities

  5. Confidentiality of the agreement

  6. Non-competition with the employer’s business interests

  7. Non-solicitation of the employer’s customers, clients and employees

  8. Non-disclosure of company trade secrets and other valuable confidential company information

In the event that one is fortunate to receive severance pay, a company may require the employee to sign documents such as a release and waiver of claims, hold harmless or indemnity agreement, etc., before releasing severance pay.  It is important to note however that not all legal claims can be waived. For instance, any agreement which prevents an employee from participating in an Equal Employment Opportunity Commission (EEOC)  proceeding or a Security Exchange Commission (SEC) inquiry is void ab initio for illegality.

Although severance pay is usually based on length of employment, some companies are willing to negotiate the severance package with otherwise ineligible employees to include some otherwise unavailable benefits. Some of the benefits an employee would desire include these top 8:

 

  1. Cash

  2. Favorable payment terms and conditions, e.g a lump sum or annuity

  3. Health, medical, dental and vision benefits – note that pursuant to COBRA, which is a federal law that provides the employee the right to continue group health benefits otherwise terminated due to separation from the employer, employers must provide the employee an opportunity to continue coverage at their own cost; as part of a severance agreement, the employer can agree to pay these costs

  4. Retaining company equipment (such as a cellphone or computer)

  5. Forebearance from challenging an application for unemployment insurance benefits

  6. Provision of outplacement, resume and social media services

  7. Letter of recommendation and other reputation protection terms and conditions

  8. Pension rights (such as profit sharing and 401(k) plans), among several other benefits that would be case-specific

Neither of the above lists are exhaustive. In fact, what each party gives and takes is highly case-specific depending entirely on each party’s priorities and capacities. An employment attorney can assist in ensuring you, as an employer receive the greatest protection for your company through a severance agreement or that you, as an employee, maximizes the benefits payable to you for the dedicated service you’ve provided to an employer.