Are Companies Required to Pay Layoff Severance?

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INTOO Staff Writer



No matter the cause for termination, letting go an employee is never easy. It can be emotionally difficult for all parties involved and can easily turn into a stressful, negative situation if not planned for properly. While there are various items to execute when parting ways with an employee, one crucial component to any layoff situation involves defining a clear policy around layoff severance pay.

When an employee’s employment is terminated, they are entitled to their last paycheck, which will cover the hours worked up until their last day. They may also be entitled to receive pay for unused vacation days, depending upon a company’s policies. But can an employee also expect to be paid layoff severance? While you might think that there is a clear yes or no answer here, it’s not all that simple. And before you can arrive at a definitive resolution there are some elements around severance pay that you should understand. Let’s start with the basics:

What is layoff severance? 

According to the Department of Labor, severance pay is a matter of agreement between an employer and an employee (or the employee’s representative). A severance package can be paid out in one lump sum or over a period of time—if the latter, it is typically referred to as a continuation of pay. Sometimes, additional benefits in a typical severance package for layoffs include healthcare coverage and outplacement services. There are factors that need to be considered when trying to establish whether an employer is required or not required to pay out either kind of severance package. Why and how an employer separates from that individual is one determining factor as to whether an employer needs to pay layoff severance. Read on for more specific scenarios.

What are employers required to pay?

You could say that an employer’s requirement to pay severance is an exception to the rule and not actually a rule itself. According to the Worker Adjustment and Retraining Notification Act (WARN), companies that have over 100 employees are required by law to give 60 days’ notice of a company closing or a large departmental closing. If employees are not notified, they will be legally obligated to provide severance pay to laid off individuals.

If an employee has been laid off due to a facility closing or they are part of a large number of employees who have been let go, some states require that layoff severance be provided. To find out your state’s requirements, visit its Department of Labor or Unemployment Department’s website (click here for a full list). When an employee is terminated for other reasons, including company mergers or situations where individuals’ jobs have been eliminated, a severance package may also be administered, but it is not required by law. As the Fair Labor Standards Act (FLSA) states: there is no requirement for severance pay and employees in a layoff situation are not entitled to any post-employment compensation.

A company may also be required to pay layoff severance if there is a formal policy in place that details the benefit will be provided upon an employee’s involuntary release. If a severance package has been verbally promised or guaranteed within an employee contract or company handbook, a company could also be obligated to deliver on those assurances.

Further, if a company has issued layoff severance in the past, that situation could have set a precedent and severance should be paid in future occurrences equal to the initial event to avoid potential discrimination lawsuits. If some employees receive severance packages, it’s important to act consistently. For example, if C-suite employees receive separation pay of some kind but lower levels do not, be clear on that distinction within your company HR materials. A company should aim to be fair with any employee separation situation. Having a formal policy in place should only help keep these standards above board and not up for interpretation or question. A formal policy could also include an employer’s rights to modify the agreement at any point in time.

Why would a company issue a severance package if not legally required? 

In situations where the law does not dictate a need for severance pay, an employer may still provide a separation package as a way to protect themselves from potential litigation and uphold their reputation as a good employer. It’s important to consider your brand’s reputation whether you are letting go an individual because of poor job performance or multiple departments due to a company-wide layoff. No matter the cause, one single bad review or report could impact your business and future hiring efforts.

In fact, 87% of job seekers said that they would be less likely to apply for a job at the company after reading employee reviews of poorly conducted terminations or layoffs. Further, Intoo’s Employer Branding Study found that 64% of consumers have stopped purchasing a brand after hearing news of that company’s poor employee treatment. These factors only make properly handling any employee’s exit a delicate matter that should be thought through and handled with the upmost care.

Again, while there may not be a legal obligation, some employers will still provide a severance package to terminated employees—especially if the separation was not related to job performance. Some company policies may extend separation pay to employees who have worked with the company for many years. In these cases, a company policy could make the amount of severance pay dependent upon the length of employment.

In any event, in order for a terminated employee to receive a typical severance package for a layoff, they will usually have to sign an agreement of separation or an exit document of some kind. This agreement will protect the employer by tying the release of monetary or additional benefits to an employee’s agreement to not sue or slander the company post-employment. A company could also include a non-compete clause within this agreement. This could prevent an employee from seeking employment at a competitor for a certain period of time in exchange for the severance package.

Layoff severance packages are negotiable. 

Any severance package is subject to change and considered negotiable up until an official agreement is signed. Always count on an employee exercising this option, so that you are not caught off guard. Determine if you are in fact willing to negotiate and draft potential offerings you would be willing to entertain adding to the package. That being said, even if an employee refuses a severance package or counters with their own terms, an employer is not legally required to accommodate their proposed changes.

Some employees may hold off signing any agreement until they review the offerings. They may also seek legal counsel to review the document, even if they don’t intend to sue, but want to wholly understand the terms. The terminated individual may also withhold their signature from a layoff severance agreement in an effort to negotiate more pay or gain additional benefits. If the employer stands by their initial offering, the employee could still choose to sign it as long as it’s within the time period stipulated.

It is more desirable to amicably part ways with an employee than not to do so. As previously mentioned, separating on bad terms could lead to potential litigation and bad press. And both job seekers and consumers care about how a company handles layoffs and terminations. So, a company should, in most cases, consider proposed changes and see what they can accommodate within reason.

Try to part ways while keeping things positive. 

In an effort to encourage a positive exit, consider including the continuation of healthcare coverage, and the inclusion of career coaching and outplacement services—a benefit given to laid-off employees that helps them transition back into the workforce. It was found that 38% of employees who were provided outplacement services were less likely to harbor negative perceptions of their former employer. Any measure you can take to deter a terminated employee from sharing a negative review is worth entertaining.

In the end, sometimes an employee and employer are just not the right fit. In those cases, it is best to keep former employees happy and as agreeable as possible. Emotions may be running high, but a fair, formal policy can help keep reactions in check. Having benefit offerings at the ready can help guide the conversation in a positive way. It will help the employee know that they have resources and support. In turn, it will give the employer confirmation within a signed agreement that the employee is willing to part without any legal or public backlash.

Intoo is here to help you with professional outplacement solutions, designed with a revolutionary approach to career transitions that are delivered at the running pace of the modern workforce. Be there for your employees from the beginning until the end and let Intoo support your business and help your company navigate the more difficult times as an employer. Schedule a demo today.



INTOO Staff Writer

INTOO staff writers come from diverse backgrounds and have extensive experience writing about topics that matter to the HR and business communities, including outplacement, layoffs, career development, internal mobility, candidate experience, succession planning, talent acquisition, and more.

Learn how to effectively build and transition your workforce.

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