UBP blog


Does your company have a severance pay policy?

In these tough times especially, it is highly recommended that employers have set guidelines in place to govern severance pay.

For employers and HR professionals that may not have a severance policy in place, we’ve answered a few questions for you on what you should know about severance. Specifically, we’ll touch on when you need to pay it, to whom you need to pay it, and when you need to spell out your policy in writing.

Are we required to pay severance?

Unless you have a contractual obligation (i.e. a collective bargaining agreement or an explicitly written promise to pay severance in employee handbooks or policy documents), you are generally not required by law to pay severance.

Who should be eligible for severance?

Generally speaking, severance packages should be given to employees as assistance to help them cover expenses while they are searching for a new position after being involuntarily terminated for reasons beyond their control. Examples are employees who were laid off as a result of a plant closure or whose jobs were eliminated entirely.

Limiting eligibility for severance pay to full-time, permanent employees who meet length of service requirements (such as a one year of service minimum) is common in many organizations.

Severance should not generally be offered to employees terminated for performance reasons or in most cases, for violating work rules. Also, it should not be offered to employees who voluntarily terminate employment (or refuse a transfer) for reasons other than a major pay cut or significant negative changes in working conditions.

Do we need a written severance policy?

Since most severance plans are covered by the Employee Retirement Income Security Act (ERISA), they should generally be in writing. Plans are subject to ERISA when they involve a significant amount of discretion on the part of the employer to determine employee eligibility and the amount of severance benefits payable to employees for different triggering events. This type of plan is contrasted to one that is applicable to a single large-scale event (i.e. a major plant closure).

In terms of what goes in the employee handbook, some employers keep their written severance policies short and sweet, leaving the detailed benefits-related information to the benefit plan material. They then include a reference to the benefit plan material in the handbook and a call to action for employees to direct any inquiries they might have to the HR department.

In any and all handbook references to severance pay, it’s vital that you make it clear that not all employees will meet the eligibility requirements necessary for automatic entitlement to severance pay. You should also make sure you have an attorney review your severance policy to make sure it complies with federal and state laws.

Blog at WordPress.com.