Severance: Should You or Shouldn’t You?

While there is no requirement in the Fair Labor Standards Act for severance pay and it’s optional in the vast majority of states, many companies still grant it when they lay off or fire employees for reasons other than issues like conduct. In fact, according to the most recent Severance & Separation Benefits survey by Lee Hecht Harrison, 97 percent of all respondent companies offered some sort of severance benefit. Why?

Most often, employers pay severance for goodwill. That’s because termination can leave workers with a negative feeling about the company, something they may be all too willing to share with others, including their former colleagues. By giving them severance pay, however, you’ll increase the chance that they’ll perceive you as being fair and supportive given the unexpected circumstances.

If you decide to offer severance pay, consider these dos and don’ts when crafting your policy.

  • Covered Workers: Decide whether you’ll provide severance benefits to all employees, from hourly paid workers to executives, or only to certain groups of employees, such as managers and executives. Severance benefits don’t have to be the same among all groups of employees, for example, granting them to exempt employees and not to non-exempt, so long as the plan does not discriminate against any employee or group of employees based upon race, sex, age, color, national origin, or any other legally protected class.
  • Benefits: Think about what you’ll offer. Employers commonly pay severance using an equation that considers the employee’s compensation at the time of termination and their length of service, for example, one to two weeks’ pay for each year of service (with predetermined minimums and maximums). Others multiply an employee’s monthly pay times a certain number of months. Some employers also consider other factors such as seniority, compensation level and coordination with other benefits. In plans considering seniority, a typical formula multiplies the employee’s pay by a number of weeks, months or pay periods covered by the policy times a seniority factor. For example, an employer might give everyone one month of severance, but add on additional weeks for each six months or each year of service after the employee’s first year of employment.
  • ERISA Considerations: A severance plan is generally considered an employee welfare benefit plan under the Employee Retirement Income Security Act (ERISA). So be sure you comply with applicable ERISA disclosure and reporting requirements such as providing a summary plan description and written claims procedures to employees and, if you have 100 or more employees, filing a Form 5500 with the IRS.

To learn more about providing severance to departing employees, download our Severance FAQs or contact Complete Payroll Solutions at 401-332-9325.

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