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.
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.
The Fair Labor 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.
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:
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