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Is Severance Pay Legally Required?

Is Severance Pay Legally Required?

For employers, a worker leaving an organization means more than saying goodbye. Between offboarding and other compliance details, employers must also address the issue of severance pay. Here's what employers should know about how severance pay works and if it's legally required. 

 

What is Severance Pay?

Severance pay refers to a lump sum or benefits an employee receives when they leave an organization, often in addition to a person's final paycheck. In some cases, severance is paid to laid-off workers to help them as they search for their next opportunity. In other cases, however, severance pay is offered in order to honor an employment agreement. An organization's approach to severance should be clearly specified in their Culture Guide or employee handbook.

 

Is Severance Pay Legally Required?

The Fair Labor and Standards Act does not require employers to offer severance pay when an employee leaves the organization, according to the Department of Labor website. However, if  a severance package is included in an employment agreement, the contract is legally enforceable.

There are a few other circumstances when severance pay may be legally binding. Some states require severance pay for factory workers who are laid off when a plant closes or in cases when an employer lays off a significant percentage of its workforce. Employers may also be required to offer severance if stated in official company materials. 

Federally, in specific situations, a severance package may be offered in lieu of the 60-day notice of a factory closing or mass layoffs required by the Worker Adjustment and Retraining Notification Act (WARN). A WARN notice is required whenever an organization with 100 or more full-time employees lays off at least 50 workers at a single site.

 

What to Include in a Severance Package

Even without a legal requirement, the Society for Human Resource Management (SHRM) notes that many employers choose to offer severance in order "to soften the blow of an involuntary termination and to avoid future lawsuits by having the employee sign a release in exchange for the severance."

So, what, exactly, should employers consider in a severance package?

Unless a prior commitment was made to deliver specific post-employment compensation, severance packages are usually designed at the discretion of the employer. In other words,  there is no set amount or percentage of severance pay, and an employer can offer any benefits they find suitable for a terminated employee. Common types of severance compensation include:

  • Wages: Money is the most common form of severance. Typically, employers will offer the terminated employee 1-2 weeks' worth of wages for each year of tenure at the company. For instance, an employee of three years may receive severance pay equal to 3-6 weeks of wages.
  • COBRA Coverage: Employers with more than 20 employees--or the part-time equivalent-- who offer group benefits must extend the opportunity for COBRA continuation coverage under the group’s health insurance plan. (For more information about COBRA, see this article: Why is COBRA So Expensive?)
  • Unemployment Compensation: Some employees may file an application for specific severance benefits upon termination. The employer may agree to offer these requested severance benefits to the employee, or they may contest them.
  • Outgoing Employee Services: In order to help a departing employee find another job, an employer may offer outgoing employee services. These benefits may be especially helpful for employees who have been off the job market for a significant period of time. Employers often agree to write letters of recommendation or to be a reference for the terminated employee.

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