Severance Packages: Key Elements and Best Practices
August 08, 2023 by Cynthia Orduña
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Severance packages are a key part of your offboarding package during a layoff or other reduction event. Not only do they help your departing employees bridge the gap between roles, but they also help your organization minimize the chances of a wrongful termination lawsuit.
Combined with outplacement services, severance can also be seen as a sign of good faith by showcasing how you treat those impacted by a layoff as they exit. But how do you craft fair and effective severance packages and communicate them to your employees? We’ll answer those questions and more to set you on a path of severance package success.
What Is a Severance Package?
Severance packages are known by various names, such as “separation agreements” or “severance payment agreements.” However, there is a slight distinction between these terms. Severance packages generally refer to the entire package that includes a severance “agreement,” as well as other components such as a lump sum payment and benefits.
The severance agreement itself refers more to the legal agreement between a company and a terminated employee. These agreements act as a waiver of liability that the employee signs upon departure. By signing, the employee forfeits the right to sue the employer for wrongful termination on grounds such as race, age, sex, or other forms of discrimination, provided the agreements are properly vetted and comply with all relevant state, local, and federal laws.
It is crucial to emphasize the importance of collaborating with your legal team when drafting severance agreements—or any other legal documents—to ensure their robustness. If you have carefully planned and executed your reduction in force (RIF) or layoff, wrongful termination concerns should be minimal. Nevertheless, severance agreements can further safeguard against such issues.
What Are the Benefits of a Severance Package?
Severance packages offer several benefits for both the employer and the employee. Here are some key advantages:
For Employers
- Legal protection: Severance agreements often include waivers of liability, reducing the risk of wrongful termination lawsuits and other legal claims.
- Reputation management: Offering severance packages demonstrates goodwill and helps maintain a positive company reputation, which is crucial for attracting and retaining talent.
- Morale and retention: Providing severance packages can boost the morale of remaining employees, showing that the company cares about its staff even during tough times.
- Smoother transitions: Severance packages can ensure smoother transitions by providing departing employees with financial support and outplacement services, reducing potential disruptions.
- Cost management: By planning and implementing severance packages, companies can better manage the financial impact of layoffs and avoid unexpected expenses from potential lawsuits.
For Employees
- Financial support: Severance pay provides financial assistance during the transition period, helping employees manage their expenses while searching for a new job.
- Access to resources: Many severance packages include outplacement services, such as career coaching, resume building, and job search assistance, which can help employees secure new employment more quickly.
- Emotional support: Outplacement services often provide emotional and psychological support, helping employees cope with the stress and uncertainty of job loss.
- Time to plan: Severance pay gives employees the time and financial security to plan their next career move, whether it’s finding a new job, pursuing further education, or starting a business.
- Maintained benefits: Some severance packages include continued health insurance or other benefits for a specified period, providing additional security and peace of mind.
Overall, severance packages can facilitate a more compassionate and professional approach to workforce reductions, benefiting both parties involved. Click below to download our free essential layoff guide to help you prepare severance packages and everything else needed for a smooth reduction event that provides all of these benefits for both you and your employees.
Who Is Entitled for Severance Pay?
Another important aspect is determining who receives severance and who does not. The reality is that no one is legally entitled to severance. Even if an employee has been with a company for over a decade, there is no legal requirement to offer severance pay.
The primary purpose of severance packages is to help the company avoid the risk of a lawsuit. So despite the lack of a legal obligation, offering severance is still considered best practice. It’s advisable to establish a company-wide severance package policy that clearly outlines the terms and eligibility criteria well in advance.
By taking this proactive approach, you’ll have a better understanding of the financial impact of a layoff, ensure employees receive a fair and predetermined amount of severance pay, and simplify a significant part of the layoff process.
What Are the Different Types of Severance?
Severance packages can vary widely depending on the company and the circumstances of the termination. Here are some common types of severance components:
Severance Pay
- Lump sum payment: A one-time payment given to the departing employee.
- Salary continuation: Ongoing salary payments for a specified period after termination.
- Staggered payments: Payments spread out over several months.
Benefits Continuation
- Health insurance: Extension of health insurance benefits, often through COBRA, for a set period.
- Life and disability insurance: Continuation of life or disability insurance benefits for a certain duration.
Retirement Benefits
- Pension plan: Lump-sum payouts or continuation of pension benefits.
- 401(k) contributions: Additional contributions or continued vesting of the company’s 401(k) plan.
Stock Options and Equity
- Stock options: Acceleration of the vesting schedule for stock options.
- Restricted stock units (RSUs): Immediate vesting or partial vesting of RSUs.
Additional Perks
- Bonuses: Pro-rated or full-year bonuses based on performance.
- Tuition reimbursement: Continued education benefits or reimbursement for courses taken.
- Office equipment: Allowing the employee to keep their office equipment, such as laptops or mobile phones.
Legal and Financial Counseling
- Legal advice: Access to legal services to review the severance agreement.
- Financial planning: Services to help with financial planning and management during the transition period.
Each company may offer a different combination of these severance types, tailored to their policies and the needs of the departing employees.
What Is Typically Included in a Severance Package?
There are two key components you need to include in your typical severance package: severance pay–also known as consideration–and outplacement services. Let’s explore both in more detail.
Severance Pay
The payment included in the severance package is referred to as “consideration” in legal terms. The amount of this payment largely depends on your organization and the specifics of the impacted employee’s role. For instance, the severance package calculator may differ for commission-based employees, where severance can be determined using their average salary or the rate of their best-performing months.
For non-commission-based roles, some companies base severance pay on the length of the employee’s tenure, creating a fair payout for everyone. Another approach is to offer a standard severance package to all affected employees, such as three months of salary in exchange for their signature.
It’s important to note that for severance payments to be legally recognized as “consideration,” they must be specifically offered as an additional part of the severance package. This means that accumulated sick days or vacation time, which are already owed to the employee, cannot be used as consideration. Think of severance pay as an additional value specifically provided for the severance package.
Outplacement Services
In addition to the lump sum payment, severance packages should include outplacement services to help departing employees secure their next role. These services support outgoing staff members by assisting with resume development, providing access to career coaches, preparing for interviews, and more. With quality outplacement services, employees can navigate their layoffs more effectively and find new roles sooner than they would on their own.
Including both severance pay and outplacement services also demonstrates goodwill to retained employees, showing that the company cares about its staff and is committed to supporting them. This can significantly boost morale and aid in the retention of surviving employees.
Severance Packages: Key Takeaways
Severance packages are an essential part of your offboarding strategy, providing vital support to departing employees and protecting your organization from potential legal risks. These packages bridge the gap for employees transitioning between roles and demonstrate your company’s commitment to treating all employees with respect and care, even in difficult times.
By combining severance pay with outplacement services, you not only assist affected employees in their job search, but also signal to your remaining staff that your organization values its workforce.
Here are the key takeaways:
- Severance packages include legal “agreements” that waive the employee’s right to sue the employer for wrongful termination.
- For employers, severance packages offer legal protection, reputation management, morale boosting, smoother transitions, and cost management.
- For employees, severance packages provide financial support, access to resources, emotional support, time to plan, and maintained benefits.
- Offering severance is not legally required, but is considered best practice. Establishing a clear, company-wide severance policy in advance helps manage layoffs effectively.
- Common components in severance packages included severance pay, benefits continuation, retirement benefits, stock options, bonuses, and legal or financial counseling.
- Severance pay must be offered as an additional benefit, not including owed amounts like unused vacation days.
- Providing outplacement services with career coaching, resume assistance, and job search support helps employees transition smoothly and demonstrates the company’s goodwill.
If you’re ready to find the right outplacement firm to help you successfully protect and enhance your organization’s reputation through your next layoff or reduction event, click below to speak with one of our experts and learn more about Careerminds’ outplacement offerings.
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