HUMAN RESOURCES: Severance Pay & Benefits

At least once each week a client asks me if his or her company must provide severance pay or benefits to an employee who is being terminated, laid off or who is resigning. To set the record straight, unless your business is located in one of four states (or the Virgin Islands or Puerto Rico), severance is not a benefit that employees are entitled to receive. There is no federal law that requires companies to provide severance pay or benefits to employees and, in all but four states, there are no state laws that require severance pay or benefits.

Of the four states that require severance, three (Rhode Island, Pennsylvania and Massachusetts) limit the severance requirement to situations involving a merger, takeover or transfer of control. In Maine, the severance pay requirement applies to companies with 100 or more employees who shut down the establishment or relocate 100 or more miles away. Only employees who have been with the company for three or more years would be eligible for severance pay.

Having said this, there are companies that choose to offer severance pay or benefits under certain circumstances. Let’s review some standard practices:

Severance benefits are typically reserved for employees who are laid off (vs. those who are terminated for performance or misconduct) or who lose a job through no fault of their own such as a reduction in force, a merger or other circumstances. The most common severance benefit is money, either as a lump sum or as a continuation of salary for a certain length of time. Some employers also offer terminated employees (paid) continued heath insurance, life insurance, pension contributions or other benefits like outplacement services, job counseling and referral, resume preparation, retraining assistance or access to computers, etc.

Of those employers who do choose to offer severance benefits, most are tied directly to length of service with one or two weeks’ base pay for each year of service being the most common formula for severance pay. A maximum dollar amount usually is placed on the total benefit an employee can receive. Some employers offer severance benefits only to managers or other upper-level employees. Another common restriction is a minimum service requirement so that only employees with significant service records are eligible for benefits. Also, some employers stop severance benefits when the recipient finds new employment.

A word of caution: If you elect to offer severance pay or benefits on an informal basis, you could be setting yourself up for a potential discrimination claim if you change the rules down the road and either don’t offer the severance to similarly situated employees or inadvertently omit employees or groups of employees who are in one of the protected classes (age, race, sex, etc.). To reduce exposure and potential liability, if you elect to provide severance benefits, I recommend that you clearly define the circumstances under which you will provide payment and benefits, the classes of employees eligible for severance (e.g., those who are permanently laid off or whose jobs are eliminated), the formula used to calculate severance, all benefits associated with the program, and specific language that reserves your right to withdraw the plan or to change it any time. To avoid the potential for a discrimination allegation, apply the policy uniformly so that all similarly situated employees receive the same benefit. 

Last, but not least, depending on the nature and circumstances of your program, there may be a number of other laws that must be complied with, including the Employee Retirement Income Security Act, the National Labor Relations Act (related to unions), and non-discrimination laws such as the Age Discrimination in Employment Act, the American With Disabilities Act, the Older Workers’ Benefit Protection Act and others. If you choose to offer severance benefits in addition to pay, it is wise to seek advice from an expert knowledgeable in these laws and regulations.