Severance Agreements for Contract Workers: How to Handle Severance in the Gig Economy

June 12, 2018 by Josh Hrala

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Severance agreements are a great way to protect your organization from wrongful termination lawsuits. By having an employee sign an agreement and providing them consideration in the form of severance pay, you can make sure that everyone fully understands the terms and conditions of the termination, giving you and your employee peace of mind.

But what about when it comes to contract workers or those in the gig economy? These job situations are on the rise and that means HR leaders will soon have to grapple with how to handle them.

The good news is that severance, for the most part, is completely up to your organization. With that being said, let’s go over a few points you need to consider.

What Is a Severance Agreement?

As a refresher, a severance agreement is a legal contract between an employer and an employee that goes over the terms and conditions of the employee’s termination. Typically, the employer offers the employee a severance package that contains a lump sum payment, usually based on the employee’s income, to entice them to sign away the right to take them to court over a wrongful termination.

A severance payment, also known as ‘consideration,’ is usually based on the employee’s salary. If you are unsure how to calculate severance payments, check out our free resource:

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In order to craft a great severance agreement, you need to work closely with your legal team to ensure that you are compliant with all local, state, and federal laws as well as the terms and conditions laid out by the EEOC.

If done correctly, your severance agreement will do a few things: negate the chance of your employee taking you to court, help you keep your hard-earned reputation intact during a layoff, and also help the employee by offering a severance payment that allows them a brief window to find a new role in another company.

Who Gets Severance Pay Usually?

Well, there are generally two types of thinking when it comes to who gets severance.

The first is that severance is based on either time worked at the company or the employee’s ‘type’. For example, someone who worked for an organization for a week, won’t get severance because that’s just not enough time.

And when it comes to ‘type,’ this typically means how the employee is paid. Do they receive a 1099 or a W-2? Are they full time or part time? Some organizations decide that, in order to get severance, employees must be full timers who receive W-2s.

This is all completely up to the organization based on their needs.

The other way of thinking is that everyone gets severance pay as a way to help employees find a new job as well as protect the company from any sort of legal hot water. While there are likely exceptions to this rule – for example, someone working there a few days or weeks – having a blanket severance agreement policy makes it a lot easier to manage in the long run.

What Does All This Mean For Contract Workers

Contractors are typically 1099 employees, which means that some companies may choose to not offer them severance.

While this is fine and completely in the right of the company, it’s not always the best options. Consider this: a contractor has been trying to get full time at your company for nearly a year and you decide to lay them off. Even though they’ve clearly shown that they are willing to work hard for you, for whatever reason they never made it to W-2 status.

If you let this person go without severance and outplacement, they can very easily turn against you. Even if they do not have a legal case to take you to court, they can always book some time in the court of popular opinion by posting about their negative experience online for the world to see.

A company’s reputation can be lost overnight. There’s no reason to not provide employees who have worked for you for a decent amount of time severance. It’s a small price to pay to ease tensions while also protecting you.

With All That Said, What Should You Do?

In the end, the call is yours, but it makes sense to offer a severance agreement to workers you value and want to possibly work with again. If the reason for their termination is strictly business related and not due to poor performance, it’s an even bigger reason.

When done correctly, severance should help things run more smoothly by helping the employee navigate their job hunt while also giving you peace of mind. Without them, you always run the risk.

Also, make sure to talk closely with your legal team to make sure you are compliant with all local, state, and federal laws as well as the guidelines set out by the EEOC. A poorly executed severance agreement can be just as bad or worse than none at all.

What About the Gig Economy?

Okay, this is where things get challenging. The gig economy is massively on the rise with countless job sites popping up to help workers use their skills to earn a paycheck. When you hire someone from one of these places, do you need to offer them the same benefits?

Right now, the common answer is no. These workers are paid on a project-to-project basis and are often not even onboarded to your company. Without them being an actual employee in any sense of the word, they typically do not receive the same treatment as those that are. This is true when it comes to severance agreements, too.

This line of thinking may change in the future, though. We cannot predict how involved the gig economy will become with normal employment schemes. However, right now, it seems like these roles are not treated the same way.

Of course, things change if you hire someone from the gig economy to work for you as a full-time contractor who receives a 1099 from your company. At that point, the person should be treated like a normal contractor and follow the same guidelines as your other staff.

Severance Agreements for Contractors: The Final Say

When it comes to severance agreements, contractors sometimes are excluded by companies that only offer them to full time staff members who receive a W-2. On the other hand, many companies do offer severance for long term contractors because, after a certain point, they are just like full time employees. They put in the work and depend this job to make ends meet.

You have to gauge what will work best for your company and the employees you hire. Remember, unless you have written into a contract that you have to provide severance, the agreements and payments are totally your call. Make sure you also work closely with your legal team to ensure that everything you do complies with all laws.

In the end, a severance agreement can be beneficial to both parties and long term contractors should, most likely, receive one if for no other reason than to avoid tensions in the future.

Want to learn more about severance agreements? Check out our guides here:

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Download Our Guide To Improving Severance Agreements!
Josh Hrala

Josh Hrala

Josh is an HR journalist and ghostwriter who's been covering outplacement and offboarding for over six years. Before pivoting to the HR world, he was a science journalist whose work can be found in Popular Science, ScienceAlert, The Huffington Post, Cracked, Modern Notion, and more.

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