Crafting Fair and Effective Employee Severance Packages
August 08, 2023 by Josh Hrala
Severance packages are a key part of your offboarding package. 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 employees? We’ll answer those questions and more to set you on a path of severance package success.
In this blog, we’ll cover:
- What a severance package is
- 3 steps to craft a fair and effective severance package
- What’s typically included in a severance package
- How to communicate a severance package
- Who’s entitled to severance and how it’s paid
What is a severance package?
For the uninitiated, severance packages go by many names, from “separation agreements” to “severance payment agreements.” However, no matter the term, they are all legal agreements between a company and a terminated employee.
Severance agreements are a waiver of liability that the employee signs as they exit. This means that they can no longer sue the employer for wrongful termination based on race, age, sex, or other discrimination as long as they are thoroughly vetted and adhere to all state, local, and federal laws.
This is a good point to underline: always work with your legal team when crafting severance agreements—or any other legal document—to ensure they’re ironclad. If you have properly planned and executed your reduction in force (RIF) or layoff, you should have nothing to worry about regarding wrongful termination. However, severance agreements can help ensure that’s the case.
To complete a severance package, you should offer impacted employees a payment for their signature. There are many ways to determine how much you should offer a departing staff member for them to sign the agreement. We’ll get into those details later. For now, you just need to know that severance packages typically include a fair payment and access to outplacement services. This will make it enticing for your employees to sign, but also act as a way to give them a leg up as they find their next position.
Three key steps to make severance packages fair and effective
While severance packages seem simple enough, they must be carefully constructed and delivered to employees. We recommend three key steps to remember when creating a severance package. Let’s get into them.
Consider Adding a Non-Compete Agreement
The main goal of a severance package is to protect your company from wrongful terminations. The secondary goal can be ensuring that your departing employees don’t immediately run off to a competitor with all of their insider knowledge.
Now that may sound like a great thing to do—and it sometimes is—but you need to remember that people often stay in a single industry for their whole careers. If you include a non-compete agreement that’s too stringent, an employee may not sign the agreement at all because doing so would leave them out of work, forced to look for a new role in a completely new market segment.
There are ways to control the flow of your trade secrets with non-disclosure agreements and other methods that should be taken during employment. But if you intend on using a non-compete, you need to remember that the goal of a severance package is to protect from lawsuits first and foremost.
If you do add a non-compete to your severance package, we recommend that you provide the employee with a list of companies that they cannot work for. This provides them with clear guidance. Again, speak with your legal team to ensure these agreements are drafted correctly and will obtain your desired outcome.
Make Sure to Explain Your Employee’s Rights
As we said before, severance packages protect your company from legal trouble during a termination. However—and it’s a big however—you cannot stop or impede your staff members from filing a claim with the Equal Employment Opportunity Commission (EEOC).
The EEOC has rules around severance packages that your legal team should take into consideration. A section of your severance agreement should lay out the employee’s rights to make sure that they understand them when they sign.
Provide Ample Consideration Time
During a layoff notification, a lot of information is given to a departing employee all at once. Not only are they being notified that the layoff impacts them, but they also now have a legal agreement sitting in front of them.
It’s important not to push your employee to sign the agreement right there and then. The law states that you must give employees at least 21 days to review and sign their severance agreement. It’s a legal document that can take time and a clear head to understand thoroughly, even in a less stressful situation.
Ensure that you explain the 21-day timeframe to your employees and encourage them to speak with an attorney. If you pressure them for a signature, it may not hold up in court, negating everything the severance agreement was supposed to cover in the first place.
Once signed, your employee also has seven days to change their minds. This is called the revocation period. If all goes according to plan, your employee will voluntarily sign the agreement in the designated timeframe, and you will part ways feeling good about the severance package on both sides.
With those tips in mind, let’s get into what you should include in your actual severance package.
What to include in a severance package
There are two main things you need to include in your severance package: severance pay—also known as consideration—and outplacement services. Let’s take a look at both in greater detail.
In legal terms, the payment you offer in the severance package is called “consideration.” Determining how much this payment should be largely depends on your organization and the specifics of your impacted employee’s role. For example, this calculation may vary if the employee is commission-based. Calculating commission-based severance packages can be done in various ways, including using an employee’s average salary or by paying them the same rate as their best-performing months.
Outside of commission=based situations, some companies like to base their severance payment on how long a person has worked at a company, which is a good way to create a fair payout for everyone.
Another way to create a fair and effective severance package payment is to offer a standard package to all impacted employees. For example, your standard offer could be that everyone impacted by the RIF gets three months of salary in return for their signature.
One thing to note here is that to be legally labeled as “consideration,” severance payments need to be offered specifically for the severance package. That may sound confusing, but it really isn’t. For example, the departing employee’s accumulated sick days or vacation time are already owed to the employee and, therefore, cannot be used as “consideration.” Think of severance pay as a “value add” specifically offered for the severance package.
Other than the actual lump sum payment, severance packages should also include outplacement services that your departing staff member can use to land their next role.
Outplacement services greatly support your outgoing staff members by helping them develop their resumes, access career coaches, prep for interviews, and more. With a great provider in place, your staff members can more easily navigate their layoffs and land a new role much sooner than if they were to go it alone.
Both the payment and outplacement services also provide a show of good faith to your surviving staff members who were retained during the layoff or RIF. It shows that your company cares about its employees and is willing to quite literally put its money where its mouth is, which can go a long way in terms of morale and survivor retention.
How to communicate a severance package
Like all steps of the layoff or termination process, how you deliver the news to staff members is very important. In fact, it may be the most important part of the entire event next to employee selection.
We’ve gone in-depth about planning and executing a layoff properly, but when it comes to severance packages, you need to remember a few essential things.
The severance package is presented to the impacted employee during the notification meeting. This meeting, which should be completely scripted, delivers the news that the layoff is impacting the employee, what their next steps are, and what benefits they will lose and retain.
Severance packages should then be given to the employee alongside any other offboarding paperwork. Remember to explain what the agreement is and what it contains. As we mentioned above, always be sure to explicitly tell the employee that they have 21 days to read it and encourage them to work with a lawyer if they’d like.
In the end, delivering severance packages to impacted staff members isn’t the most challenging aspect of a RIF event. Instead, severance packages will usually take a larger amount of time to iron out with the support of your legal team.
Who is entitled to severance and is it required by law?
One of the final aspects we’ll cover is who gets severance and who doesn’t. While it may seem like an unsatisfactory answer, no one is legally entitled to severance. Even if a worker has been with a company for over a decade, they are not—by law—required to be offered severance pay.
Severance packages help the company avoid the chances of a lawsuit. That’s their primary purpose. There are no laws requiring it.
Remember, however, that even though you are not legally required to offer it, it’s best practice to do so. You should create a company-wide severance package policy that clearly lays out what payment packages are and who is eligible for them well before you ever need them.
If you take this approach, you’ll better understand how much a layoff will cost you, your employees will receive a fair and agreed-upon amount of severance pay, and a big part of the layoff process will already be figured out for you.
How are severance payments actually paid?
Lastly, it’s crucial to understand how to actually pay out severance payments. Generally, there are two ways you can do this: in a lump sum or in installments.
We typically recommend a lump sum payment because it allows you to have a clear separation with your staff member while also letting them completely focus on their next step without worrying that an installment payment may not come.
There are times when a lump sum just isn’t on the table, though. For example, a company may be holding a reduction event because of financial instability, so the cash on hand may not be available to pay out a lot of lump sum payments. The better option then would be to pay in installments.
Another tactic some companies use is to structure their severance pay based on employee salary. This way, instead of offering a lump sum or installments of a determined lump sum, you could continue to pay workers their normal salaries for a certain period of time. An example of this would be terminating an employee and then continuing to pay their salary and provide them benefits for a month or two.
This strategy has a few benefits. First, it helps you better control your payments. It also essentially pushes your “true” termination date back while allowing your impacted workers to go and seek new roles because they are no longer working. Lastly, it gives your employees a clear timeframe. They will simply continue getting paid their normal compensation for that time period, which is very easy for them to understand.
Which method you choose comes down to how your company operates and where your finances are at the time of the reduction event.
Fair and effective severance packages: the takeaways
Severance packages are a great way for employers to protect themselves from wrongful termination lawsuits by offering departing staff members payment in exchange for having them waive liability.
This helps your company ensure a reduction event doesn’t lead to further losses through lawsuits and legal battles, while the payment is highly beneficial to your terminated staff members, allowing them to have a safety net as they search for a new role.
One of the best benefits to include in your severance packages is to pair the payment with outplacement services. Outplacement is a great resource designed to help your displaced employees land new roles as swiftly and smoothly as possible.
In need of outplacement assistance?
At Careerminds, we care about people first. That’s why we offer personalized talent management solutions for every level at lower costs, globally.