Overview: Severance pay is a form of payment or offer of benefits made by the employer to an outgoing employee, typically in exchange for an agreement governing post-employment rights and restrictions. Occasionally, severance pay is also used as compensation for loss of employment. Importantly, there are no federal or state laws that require employers to provide severance pay to their outgoing employees. This is a strictly voluntary tool used by employers to minimize risk.
Depending on written employer policies and procedures, employees may be under the impression that severance pay is part of an implied contract between the employer and the employee. Given that possibility, employers should make it extremely clear what the stance is pertaining to severance pay. Specifically, they can enact policies and procedures detailing when it will be offered, when it will not be offered, and what employees may have to give up in exchange for it. HR professionals will have an important role in crafting such agreements and where necessary, negotiating with outgoing employees who are candidates for severance. In that regard, HR's role in conducting exit interviews and identifying post-employment risk is crucial toward using severance as a guard against post-employment legal exposure or undue competition.
At an employee termination, the employee may be offered severance pay in exchange for his or her waiver or release of claims against the employer, meaning the employee would waive his or her right to sue the employer. These agreements are largely enforceable if they are bargained for in good faith and are crafted in a way to ensure that employees are capable of understanding the terms. Alternatively, resigning employees may be offered severance in exchange for signing a non-compete agreement or restrictive covenant. Similarly, these agreements are largely enforceable if they are considered fair and balanced, and if they are reasonably crafted to protect the employer's interest, without overly restricting the employee's ability to find new employment.
Trends: Employers who use a formal severance program may be bound to comply with the Employee Retirement Income Security Act (ERISA), which regulates formal pension plans provided to employees in private industry. Where employers offer severance in exchange for release of claims to older employees who are eligible to make age discrimination claims, employers and HR professionals should be mindful of the Age Discrimination in Employment Act (ADEA) and its restrictions on enforceability of waivers. Similarly, the Older Workers' Benefits Protection Act establishes specific requirements to ensure that employees agree to such waivers on a "knowing and voluntary" basis and that such workers are provided with adequate consideration in exchange for their waiver.
Author: Michael Jacobson, JD, Legal Editor
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