In a layoff, must we provide severance pay?

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in Compensation and Benefits,Human Resources

Q. Our company is going to lay off several employees. Are we required to provide severance pay to those employees? If we provide severance pay, can we demand that employees sign a severance agreement stating that they will not sue the company?

A. Severance pay is a matter of agreement between an employer and an employee (or the employee’s representative). There is no requirement in the Fair Labor Standards Act (FLSA) for severance pay.

However, any earned wages must be paid to the em­­ployee. Under the FLSA, employees must be paid at least the federal minimum wage for all hours worked in a workweek and time and one-half an employee’s regular rate for time worked over 40 hours in a workweek. Many states also have minimum wage laws and where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.

Many employers choose to provide a severance package to help newly unemployed employees. Severance packages may include:

  • An additional payment based on months of service
  • Payment for unused vacation time or sick leave (although in many states, accrued vacation is considered earned wages and must be paid to the employee)
  • A payment in place of a required notice period
  • Medical, dental or life insurance
  • Retirement benefits
  • Stock options
  • Access to employment services to help the employee find a new job.

In exchange for the severance package, many employers will have the employee sign a release stating that the em­­ployee will not sue the employer, and that if the employee does sue, he or she will have to return the severance pay.

However, it is important to note that the EEOC takes the position that, despite the use of broad language in these releases, an employee can still file a charge with the EEOC if the employee believes that he or she was discriminated against while employed or was wrongfully terminated.

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