Severance Pay

When an organization terminates an employee due to job cuts or any reason other than a resignation or discharge for cause, the person receives severance pay.

Severance policies are generally considered employee benefit plans entitled to ERISA protection, many courts have ruled. For employers, this means conforming to ERISA’s recordkeeping and disclosure requirements.

Recommendation: If you have a severance pay plan or are thinking of establishing one, review the details with your legal adviser to ensure compliance with ERISA and to determine that the provisions are reasonable and legally sound—particularly if the policy will include waivers.

No federal law mandates severance pay. If you decide to offer severance or other benefits, consider making the payment or benefit contingent on the employee signing a release of any liability for employment discrimination. Just be sure that an attorney prepares the release because certain technical conditions must be met for such a release to be enforceable.

If you offer severance packages, don’t assume workers want money. You may want to negotiate noncash options into your severance plan. You could save money plus avoid legal trouble: A departing worker who feels that he or she squeezed some concessions out of you is less likely to sue later.

Also, don’t assume that taking a severance check always means that the employee can’t bring a complaint to the EEOC or that the agency won’t sue. In fact, the EEOC has filed federal lawsuits against employers challenging their right even to include an “I agree not to sue” clause in the agreement.

In EEOC v. Lockheed Martin Corp., 444 F. Supp. 2d 414 D. Md. (2006), the court ruled that Lockheed’s severance agreement was facially retaliatory. In EEOC v. Ventura Foods, LLC, No. 05-663 D. Minn. (2006), Ventura settled, agreeing to remove language from its standard severance agreement that required separated employees to agree not to file a discrimination charge in exchange for severance; re-offer severance benefits to former employees who had refused to sign the agreement; and notify employees who received benefits of their right to file a charge without losing benefits or violating the terms of their prior severance agreement.

Note: In 2014, the U.S. Supreme Court unanimously ruled that severance pay is subject to withholding of FICA taxes, which employers and employees pay to fund Social Security and Medicare. U.S. v. Quality Stores, Inc., No. 12-1408