Does the Law Require Severance?
Employers should keep in mind that severance is not mandated as a matter of law. However, there are a number of considerations that may lead to the conclusion that this practice is in fact required.
There is no federal statute that requires employers to provide severance. Accordingly, whether to provide a particular departing employee with severance pay is generally left up to an employer’s discretion. Some employers have elected to provide severance to at least some employees. And many employers’ philosophies may lead them to provide severance to all departing employees, particularly if the employer has a positive outlook for the future and anticipates hiring for the same or similar positions in the near future. However, under state anti-discrimination laws, the decision not to provide severance pay must not be discriminatory, so employers may want to consult with an attorney for guidance in individual cases.
The most significant exception in the employment law context to the employers’ discretion to provide severance is contained in the WARN Act and comparable state laws . Under the WARN Act most employers with 100 or more employees must provide eligible employees (generally those with at least six months of service during the preceding 12-month period) with at least 60 days’ prior written notice regarding a "plant closing" or "mass layoff."
An employer may find that, even when severance is not required by law, it may make sense to offer severance to all exiting employees. For example, without an adequate severance policy or legal release requirements, an employer that has terminated an employee and paid severance might be surprised if the employee later claims that the payment was actually severance. If an employer wants the flexibility to pay only certain exiting employees severance, such flexibly may be limited by state wage payment requirements, which could require an employer to pay all wages and commissions to all employees promptly regardless of any pending settlement negotiations. In addition, employers that wish to limit severance must be wary of potential age discrimination claims under the ADEA such as those raised in the Supreme Court’s 2015 decision in EPIC Systems v. Lewis, given that the "severance" that is subject to the policy is earned wages.
State-Specific Severance Regulations
The applicability of state laws to severance pay helps define which employees are entitled to severance compensation and the level of payment – such as a salary continuation instead of a one-time lump sum payment. Federal employment laws usually do not apply to severance packages. So states with minimal severance regulations often have the least restrictive requirements.
California is one state that has specific requirements for payments to an employee when an employment ends. The Quilici v. Northrich Corp., case [No. C 04-3631 SBA, 2005 WL 5988665 (N.D. Cal. Nov. 15, 2005)] is a prime example of a case in which a company was required to pay $6,000 to an employee as part of the severance agreement. The company failed to mention the amount of the payment at the time it terminated the employee. Under California state law, the company was required to provide the employee termination pay at the time employment ended. Therefore, the defendant was liable for an additional payment of $6,000.
In North Dakota, any vacated or abandoned vacation time must be paid out when the employment terminates. However, unlike California, no law requires employers in North Dakota to pay severance when terminating an employee. South Dakota recently enacted a law requiring an employer to pay accrued and unused vacation, but does not mandate severance pay. [Class 62, p. 98 (2011)] If the company policy has been to award severance to terminated workers, it must continue to do so unless it changes the policy in notices to all employees.
For the purposes of the Employment and Workforce Services Protection Act of the Virginia (Va. Code Ann. ยง65.2-434), specified severance bonus discharge is a discharge provided by an employer who agrees to provide more than what the Virginia Employment Commission requires to a worker after he or she is laid off or discharged.
At-Will Employees and Severance
Generally today most employees are presumed to be employed on an "at will" basis. That means there is no legally enforceable contract or promise for continued employment and, as a result, the employer is free to terminate the employment relationship at any time for any reason, with or without notice (provided, of course, the reason is not discriminatory, prohibited by contract or otherwise restricted by law). The employee is equally free to end the relationship at any time and for any reason, with or without notice. Thus, employers are under no obligation to provide severance pay to an "at will" employee. However, many companies find it advantageous to do so, if for no other reason that such payments may help soften the impact of the separation on the employee and may reduce the threat of litigation. For this reason, companies should consider their budget, the value to be provided and the terms and conditions of payment to determine when, if ever, they should offer severance to an at-will employee. Some common examples of circumstances when severance should be considered include: Note: Severance pay plans that are terminated in violation of ERISA may be deemed a prohibited reduction of pension benefits under ERISA; thus, the prudent employer will consider plans under ERISA, if applicable.
Employer Policies on Severance Packages
Employer policies can have a significant impact on the extent of an employee’s entitlement to severance pay.
Most employers manage the employer-employee relationship through policies and processes, and some of these policies and processes can override what the law requires. For example, if an employment contract or a collective bargaining agreement requires a certain amount of notice or pay in lieu of notice, that will become the minimum requirement even if it’s less than what the law requires. Similarly, if an employment contract or a collective bargaining agreement provides for a severance package including various support services, such as outplacement and counselling services, those additional benefits may be required by the agreement and not just considered "gracious" employer contributions to an employee’s transition to new employment. Applicable legislation may also permit an employee’s claim for severance pay to be satisfied by other means, such as re-training and job placement assistance, so that the employer’s overall severance obligation to pay money may be minimized.
Court decisions that have considered the enforceability of "termination without cause" provisions in employment contracts require that they must be enforceable to be valid , including the following:
Employees are also obligated to mitigate their losses by making reasonable efforts to look for new employment. As such, if an employee spends time in external training or retraining in order to find new employment, a court will consider how much this external training is worth, i.e., whether the employer should get some mitigation credit because the employee may be better off economically after the training. In some cases, an employee will be entitled to severance at a rate that denies him from benefitting from the mitigation achieved during the notice period, so instead he will be offered a severance allowance in exchange for signing a release for his mitigation efforts.
In a unionized context, though, the contract that exists between the employer and the union will govern the extent of the employer’s entitlements and obligations. This could be a collective agreement, and the particular terms on severance from that collective agreement will apply. This could also be a letter of agreement for a particular group of employees that has been signed by the employer and the union president, setting out severance terms. Such letters may then apply on a precedent-setting basis to other current or later employees who are similarly situated.
Negotiating a Severance Agreement
Even though employers are not legally required to provide severance pay, in practice they often do. Whether as a matter of company policy or in order to avoid claims related to the termination, companies typically offer severance at the time of termination and often include a release of claims in the severance agreement. Whether an employee ultimately accepts the severance package offered is a question that will depend on the strength of the employee’s legal claims against the company, the likelihood that the claims would prevail if litigated, the nature of the separation and the employees’ future job prospects with the employer, and any other issues such as medical claims. Given this fact, negotiating is an important part of the process. As an initial matter, it is important to determine how long the severance check will last for. Will the payments be made weekly, monthly or in a lump sum? This is particularly important if the employee needs to bridge a gap between employment and retirement so that he or she can continue receiving health insurance coverage. How the payment will be structured and the duration are also important for the company’s perspective and should be reviewed with an attorney familiar with wage and hour laws, state requirements and other payroll issues. The terms of the continuation of medical benefits are also an important part of severance negotiations. Can the employee continue his or her coverage through COBRA and for how long? Will the employer pay for any of the COBRA coverage or continue the employer contributions for a period of time? Are any accrued vacation benefits or sick time a part of the severance package? Are bonuses being offered as part of the package? Will accrued vacation time or sick time be paid out or deferred? Is the employer going to keep any health insurance benefits in lieu of advancing the severance money in exchange for the release? Severance packages are just that . . . packages. Everything should be considered. Put into context and then a decision can be made by the employee who can be counseled on his or her legal rights and obligations and possible strategy for handling the situation.
Sought Legal Assistance for Severance Agreements
Employers and employees alike should have legal guidance in the context of a severance agreement. For employees, an attorney can assist in examinations of the enforceability of a non-compete or a non-solicit for example. As is the case with any contract, there are times when you need an exclusive legal right to review the agreement. For example, if your severance agreement has a confidentiality provision , you may be prohibited from telling anyone else about the agreement. If your agreement contains a release of all claims, you may be prohibited from filing a lawsuit to recover other compensation.
For Employers, it is prudent to obtain legal advice on the form of the agreement itself. Attorneys can help develop severance packages that maximize employer discretion while still providing protections to terminated employees.