Severance Agreements for Hourly Employees: Should You Offer Them?

Severance agreements are a great way for companies to offboard employees in a way that protects them from lawsuits in the future by spelling out in detail the terms and conditions of the termination.

In other words, a severance agreement is a legal contract between an employer and an outgoing staff member that explains everything the person needs to know about their termination and also waives their right to take the company to court over a wrongful termination.

To get employees to sign the document – and to make it legally binding – companies must offer the outbound staff member a severance payment that is usually calculated by how much the employee earns and how long they have worked at the company.

But do you need to offer severance agreements for hourly employees? Should you always use a severance agreement? These are a few questions you might have when gearing up for a reduction in force (RIF) or layoff event.

Let’s dig in.

First off, it’s important to note that you do not need to offer severance agreements to staff members. Yes, they help you negate lawsuits and also set your employees up with a way to get their upcoming job hunt, but they are not legally required when letting staff go.

In fact, many employees have policies that dictate who gets a severance agreement and who doesn’t. Most of the time, this depends on what ‘type’ of employee they are based on how they’re paid.

For example, many organizations do not offer severance agreements to 1099’d workers but do offer them to full-time, W-2’d, employees. There are often exceptions made to commission-based workers – such as salespeople – who are typically offered agreements just like normal W-2 employees.

So what does this mean for hourly employees?

Well, for the most part, hourly employees are divided into full time and part time workers based on how many hours they put in per week.

On average, those who work 40-45 hours or more are considered full time and those who work less than that are labeled part time.

Like we mentioned above, full-timers typically get severance agreements no matter what, but part-timers are a different story.

It largely based on what the company wants to offer and who they believe may land them in court.

So, in other words, severance agreements largely depend on what the company wants to use them for.

With that in mind, here’s what you should consider when it comes to severance agreements for hourly workers, specifically.

Most HR leaders say that companies should offer severance agreements to employees who have a higher likelihood of taking the company to court, such as older workers (those over 40) and those in other protected groups. You can learn more about how these severance agreements are crafted here.

Since severance agreements are meant to protect the company, this makes a lot of sense. If you can offboard a staff member without paying them a severance payment and you are in a situation where you need to have a RIF in the first place, why pay it?

Well, there are a few reasons, actually. One is that a severance payment actually does more than protect the company – it also helps the employee find a new job by helping them have a paycheck when they look for new work. This shows that you care for your employee even after they make an exit from your organization.

As you can probably tell, we are fans of severance agreements because if they are done correctly, they can protect the company while also helping the employee. These win-win situations are what your business should aim for.

We must note, though, that if you want to create an iron-clad severance agreement, you need to work closely with your legal team to ensure that you are complying with all local, state, and federal laws along with the rules and guidelines set forth by the EEOC and other workers rights groups.

So, as you can see, it’s really your call as to if you want to provide a severance agreement or not. However, if you do, you’ll need to learn the different ways to calculate how much pay to offer.

Also, it’s important to note, that payment is a mandatory part of a severance agreement. In the legal world, this is called ‘consideration,’ which basically means that in exchange for the signature, the employee will be compensated in some way.

Calculating severance pay can be as easy or as complicated as you want it to be, too.

Typically, severance pay is calculated by looking at the employee’s salary and how long they have worked for the organization. If you want to learn more about calculating severance pay, we made an easy to use calculator to get you started.

You can check that out here:

The main point to consider when crafting a severance payment is to make sure it is enticing enough to get your employee to sign. If the payment is too low, the employee will just walk away and may even be insulted by the offer, which can open you up to the lawsuit you were trying to negate and also foster resentment within the staff member who can go online and mess up your hard earned reputation.

To make the package even more enticing than just a lump sum, we suggest offering outplacement services alongside any other benefit extended to outbound employees.

Outplacement services, as a refresher, are provided by outside organizations that specialize in helping people find new work after a layoff or RIF. By combining expert coaching and digital tools, outplacement providers get workers placed in new roles faster than if they didn’t have support.

Besides truly helping your employee make a transition to a new role, outplacement seriously protects your organization’s reputation by showing that the organization cares for their staff even after they make their exit.

You can learn more about outplacement, specifically how much it will cost, here:

We covered a lot of stuff here. Let’s have a quick rundown.

When it comes to offering severance agreements at your organization, the choice is yours. It’s always a good idea to use them, though, despite the fact that there is no law mandating it.

Severance agreements help protect your organization from future lawsuits from the folks you had to let go during a layoff or RIF, which is why it’s always a good idea to use them.

Typically, organizations offer severance packages to full-time workers who receive W-2s. For hourly workers, this may be both full-time and part-time workers. Part-time workers, though, usually come and go faster than full-timers, making their severance package consideration a bit different.

You could say that in order to get severance a person must work at your organization for a certain amount of time, which would then let you to offer it based on a different system that how their taxes are filed.

These decisions will differ from organization to organization. You should speak with upper management and also your legal team to understand whether or not you should offer a severance package. You should also take special care to make sure you are compliant with all local, state, and federal laws.

Make sure your severance payment is enticing enough that your employee will want to take the offer. We also recommend that you offer other benefits alongside the severance payment, such as outplacement services.

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 you have a strong overall policy in place.

To learn more about severance agreements, check out our guide here:

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.