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
This checklist may be used to help an employer identify all the important points to address during the negotiation and drafting of a severance or termination agreement.
In-depth review of the spectrum of Colorado employment law requirements HR must follow with respect to voluntary terminations.
This letter may be used to create an official termination letter for an exiting employee to memorialize the end of the employment relationship. This letter should be sent to an exiting employee only when a final, official decision to terminate the employee has been made.
This briefing for supervisors provides a protocol and best practices for employee termination, from the disciplinary process through to the post-termination period.
This section helps HR professionals understand and comply with the federal requirements pertaining to the process of an employee termination. Guidance and best practices for the termination process are also addressed.
An employer may use this form to build or reach a severance or "termination" agreement with an outgoing employee when the employer is either contractually bound to provide severance or it determines that providing severance is in its best interests. Common scenarios in which employers elect to provide severance are when they desire a (mostly) clean break with an outgoing employee, they desire to maintain good relations with the outgoing employee or when the employer desires some protection from the outgoing employee against risks associated with litigation, competition or security.
Use this workflow to properly choose the appropriate employees to be included in a reduction in force, and to navigate through the requirements of the Worker Adjustment and Retraining Notification (WARN) Act without creating further exposure for the employer.
HR guidance on severance pay, the legality and enforceability of severance agreements which include waivers or releases of claims, methods for HR professionals to screen employees, identify post-employment risk and negotiate severance agreements.