Doing the Right Thing
In these troubled economic times, everyone's looking for places to cut costs. So what about reducing or eliminating severance payments and benefits? It's certainly fair game to consider legally, at least in the U.S. But for most employers, offering severance packages is part of an overall benefit plan that helps them recruit superior talent. As Barbara A.F. Greene, of CPI partner firm Greene and Associates, Inc., said in a recent San Antonio Business Journal interview, "A good, insightful, strategic company wants to invest in their employees. When they do have to lay off employees, they provide severance pay and other benefits ... They realize that the employees who are staying will look at how their friends and colleagues who are laid off are being treated."
An October 2008 survey conducted by the American Management Association and the Institute for Corporate Productivity indicated that 60 percent of the 314 companies surveyed offered a package to all employees, while 17 percent used a case-by-case approach. Surveys of large companies suggest that they are more likely to offer severance packages. The AMA study showed that 9 percent of small companies, but only 4 percent of large companies do not offer severance packages.
Some variance in those statistics occurs in other surveys. A 2009 survey of 200 Michigan employers by the American Society of Employers (ASE) indicated that 25% of employers did not or would not offer severance packages. Generally consistent with that Michigan survey, an October 2008 poll of 633 HR professionals by the Society for Human Resource Management (SHRM) indicated that 74 percent of the companies would offer severance pay.
With the exception of top-level executive arrangements, severance pay is often calculated using a formula that factors in longevity. Many employees receive one or two weeks of pay for each year of service. However, it is quite common for there to be a cap on the total number of weeks of pay any employee will receive.
Legal Considerations
In the U.S., companies are required to pay unemployment insurance tax, but that is separate from severance pay. What might eventually result in a legal requirement to pay severance, though, is inclusion of severance pay in an employment contract or an employee handbook. Companies that have historically offered severance pay to employees in similar positions could potentially be required to continue such payments by virtue of there being an "implied contract" with employees, leaving them reasonable expectation that they would receive such compensation.Who Gets What and How Much?
Today's headlines are sprinkled with news of the bonuses and golden parachutes that executives being asked to step aside have negotiated. Some companies do not extend the severance benefit to all employees, opting to administer severance on a case-by-case basis. However, Greene offers this advice: "A severance package should look at the whole workforce. While the CEO is someone who has a different type of experience than other employees, it's about the message the company is conveying to everyone."An October 2008 survey conducted by the American Management Association and the Institute for Corporate Productivity indicated that 60 percent of the 314 companies surveyed offered a package to all employees, while 17 percent used a case-by-case approach. Surveys of large companies suggest that they are more likely to offer severance packages. The AMA study showed that 9 percent of small companies, but only 4 percent of large companies do not offer severance packages.
Some variance in those statistics occurs in other surveys. A 2009 survey of 200 Michigan employers by the American Society of Employers (ASE) indicated that 25% of employers did not or would not offer severance packages. Generally consistent with that Michigan survey, an October 2008 poll of 633 HR professionals by the Society for Human Resource Management (SHRM) indicated that 74 percent of the companies would offer severance pay.
With the exception of top-level executive arrangements, severance pay is often calculated using a formula that factors in longevity. Many employees receive one or two weeks of pay for each year of service. However, it is quite common for there to be a cap on the total number of weeks of pay any employee will receive.
Conditions of Severance Pay
In "exchange" for the severance pay, most employees are asked to sign a release relinquishing the right of future litigation with respect to the separation. The number of employees choosing to negotiate the terms of their severance is dramatically increasing, according to several sources. With the large number of layoffs occurring, companies are offering specialized services to help the laid-off employees to negotiate better deals with their employers. Employees over age 40 are sometimes asked to sign an additional waiver with respect to age discrimination lawsuits. Some companies also require a non-compete agreement, but the wording of these must be restrictive enough such that they are fair to the employee in order to be enforceable.Other Severance Package Benefits
The 2009 ASE survey indicated that nearly half of employers offered outplacement benefits to downsized employees. Group medical benefits under COBRA have recently been enhanced by the American Recovery and Reinvestment Act of 2009, which provides for reduced premiums for downsized employees for the extended COBRA coverage period. Letters of reference; payment for untaken holidays, vacation, and sick leave; extension of other insurance benefits; and stock options are other benefits that some employers include in their severance packages.
Employers should be mindful that in this economy, existing employees watch closely how their peers are being treated during downsizings. The ramifications may not be immediate, but could result in high attrition when new job opportunities eventually increase. Make sure that your calculations of severance benefits are accurate. If you make a payment error in the employee's favor, take a cue from Microsoft's embarrassment and let it go. And remember, more than just your employees will be watching; the Web spawns its own specialized coverage, such as the layoff satisfaction survey being conducted by GeekMBA360.com.
