What factors should we weigh when deciding whether to offer severance package?

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in Employee Benefits Program,Firing,Human Resources,Leaders & Managers,Management Training

Q. We are downsizing and letting go a long-time employee. We want to help her out by giving her a severance package. What should we consider?

A. Paying an employee a severance upon termination is not required by law unless the employee has a contract providing for it. However, paying a severance, if the company can afford it, is certainly a valid and laudable choice.

You should consider several things:

Do you want something in exchange for the severance payment, such as a release of liability for potential discrimination claims? These releases must be carefully crafted to comply with governing federal statutes that require specific time frames in which an employee may consider the agreement and revoke it once accepted.

Have you considered the effect on future employees of granting severance to this employee? It may create a precedent or expectation in other employees.

You will need to ensure that the decision to offer (or not offer) packages to other employees in the future does not appear discriminatory. It is OK to treat employees in legitimately different classifications differently—for example, employees in higher management positions, those with more seniority and those who work in different locations.

However, if you offer only this female employee a severance package, a male employee not offered severance in the future, who is similar to this employee in seniority and position, may question his differential treatment.

Have you paid severance to employees in the past? For the same reason of avoiding the appearance of discriminatory decision-making, use historic severance agreements as guidelines for deciding which benefits to provide now.

What about severance and unemployment comp?

Q. Regarding this same employee, what may we do to maximize her unemployment benefits?

A. Receipt of a severance payment in a given week disqualifies a former employee from receiving unemployment benefits that week.

When severance is paid in a lump sum, covering more than one week, the Employment Security Commission will allocate the sum pro rata over ensuing weeks. Therefore, severance will delay entitlement to unemployment compensation.

You should not take any steps to try to sidestep this, such as mischaracterizing the reason for or the amount of the payment when reporting to the ESC. 

 

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