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Severance agreements are a great way for companies to offboard employees in a way that protects them from future lawsuits. It is a legal contract between an employer and an outgoing staff member that explains everything the individual needs to know about their termination and waives their right to take the company to court over a wrongful termination.
But do you need to offer severance agreements for hourly employees? Do hourly employees get severance pay? And how do you determine what severance pay to offer to ensure fair and effective severance agreements that hourly employees will sign?
These are a few questions you might have when gearing up for a reduction in force (RIF) or layoff event. Let’s dig in.
Are Hourly Employees Entitled to Severance Packages?
First and foremost, severance agreements are not legally required when letting employees go. While they can help mitigate legal risks and provide financial support for departing staff, offering them is entirely at the employer’s discretion.
Many companies have policies outlining who qualifies for severance based on employment classification. Typically, severance is offered to full-time, W-2 employees, but not to independent contractors (1099 workers). Exceptions may apply to commission-based roles, such as sales positions, where severance agreements are more common.
For hourly employees, eligibility often depends on their classification as full-time or part-time. Generally, those working 30 hours per week or more are considered full-time, while those working fewer hours are classified as part-time. Full-time hourly employees are more likely to receive severance, whereas part-time employees may not, depending on the company policy and risk assessment.
Ultimately, severance agreements are a strategic decision based on what the company aims to achieve, whether that’s reducing legal exposure, maintaining goodwill, or supporting transitioning employees.
How Is Severance Calculated for Hourly Workers?
One critical element of a severance agreement is compensation. If you do choose to provide severance agreements for hourly employees, it’s essential to understand how to calculate their severance pay appropriately. In legal terms, this is known as “consideration,” meaning the employee must receive something of value in exchange for signing the agreement.
Severance pay calculations can range from simple to complex, depending on your approach. Most commonly, severance is determined based on an employee’s salary and tenure with the company. To simplify this process, we’ve created an easy-to-use severance pay calculator to help you determine an appropriate payout based on industry standards.
When crafting a severance package, the key is to make it compelling enough to encourage the employee to sign. If the offer is too low, the employee may reject it outright, feel undervalued, or even pursue legal action—defeating the purpose of the agreement. Additionally, dissatisfaction with severance terms can lead to negative online reviews that damage your employer brand.
To enhance the appeal of your severance package beyond a lump-sum payment, consider offering outplacement services. These services, provided by external organizations, assist employees in finding a new job by offering career coaching, resume support, and job search tools.
Beyond genuinely helping employees transition, outplacement services reinforce your company’s commitment to its workforce—even after separation. This proactive approach not only protects your reputation, but also fosters goodwill among remaining employees and the broader professional community.
When Is Severance Pay for Hourly Workers Important to Offer?
Most HR leaders recommend offering severance agreements to employees who are more likely to pursue legal action, such as those over 40 or individuals in other protected groups. These agreements serve as a safeguard for companies while providing departing employees with financial support.
Since severance agreements are primarily designed to protect the company, it’s reasonable to question whether they’re necessary, especially during a reduction event. If an employee can be offboarded without severance, why offer it?
Here are several compelling reasons to offer severance pay for hourly workers:
1. Job Security and Uncertainty
Hourly workers, unlike salaried employees, often face more job insecurity as their hours can fluctuate, making them more likely to be laid off during business slowdowns or changes in workload. Offering severance gives them a cushion to help navigate this uncertainty and provides some financial stability during a potentially unpredictable transition.
2. Frequent Employment Gaps
Hourly workers may experience more frequent employment gaps due to the nature of their roles. Since many hourly positions are temporary or seasonal, having a severance package can help smooth the transition between jobs, especially if their next job is not immediately available. This can help reduce the stress of finding a new position quickly.
3. Demonstrated Commitment to All Employees
Hourly workers are often overlooked when it comes to benefits like severance, so offering it shows that your organization values all employees equally. It can help shift the perception that only salaried employees are deserving of company-provided benefits, which can improve morale and build trust among your hourly workforce.
4. Protection Against Potential Unemployment Claims
Since many hourly workers rely heavily on their paychecks, being laid off or terminated may force them to depend on unemployment. Offering severance can make the process smoother, reduce the risk of litigation, and provide additional resources while they wait for any unemployment benefits. It can also reduce the number of unemployment claims the company faces.
When structured correctly, severance agreements create a win-win scenario—protecting the company while also assisting employees in their next career step. However, to ensure these agreements are legally sound, it’s essential to collaborate with your legal team. Compliance with local, state, and federal laws, as well as anti-discrimination statutes, wage regulations, and workers’ rights guidelines, is crucial to crafting an effective and enforceable severance agreement.
Key Takeaways: Severance Agreements for Hourly Employees
In the end, severance agreements are meant to protect your organization. So using them when laying off hourly workers is up to you. You can craft an agreement that takes into account all of the different employee types to ensure that you have a strong overall policy in place.
Here are the key takeaways:
- Offering severance agreements is optional: While not legally required, severance agreements are highly recommended to protect your organization from potential lawsuits during layoffs or reductions in force (RIFs).
- Severance agreements for hourly employees: Typically, severance agreements are offered to full-time employees. For hourly employees, whether full-time or part-time, eligibility depends on your company’s policies and the employee’s tenure.
- Consult with management and legal teams: Before implementing severance packages, consult with upper management and your legal team to ensure compliance with all local, state, and federal laws.
- Offer an attractive severance package: To encourage employees to accept the severance offer, ensure the payment is compelling. Consider adding outplacement services to help transitioning employees find new roles.
- Tailor your severance policy: While the decision to offer severance is up to your organization, crafting a comprehensive policy that accounts for various employee classifications will help ensure consistency and legal protection across the board.
If you’re ready to find the right outplacement firm to help you successfully protect and enhance your organization’s reputation while supporting your impacted employees through your next layoff or reduction event, click below to speak with one of our experts and learn more about Careerminds’ industry-leading outplacement offerings.
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