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What You Need to Know About Severance Packages

Business owners everywhere can agree that people are the lifeline of a company. The people you hire can make or break your business. Yet as an employer, it is essential to recognize that things are continuously changing. This being said, there are instances when you may have to terminate an employee. Developing a severance package is one effective strategy for dealing with exiting employees.

A severance package provides pay and sometimes benefits to a departing employee. There are a couple reasons why you may want to consider offering severance packages. First, by giving a severance package, you are helping ease the transition away from the company by providing additional pay to the employee. Second, implementing a severance package may protect the company from litigation: Severance pay agreements often include a release of potential claims that may exist. These agreements can also include provisions for which exiting employees agree not to speak negatively about your company.

If you are considering offering severance packages, it is important you do it correctly. Here are several things that you should keep in mind:

  1. Eligibility. 

When crafting a severance plan, it is important to think about which employees will be eligible for the package. Some business owners limit severance packages to full-time employees or executive employees only. 

  1. Design structure. 

In designing your severance package, consider what you would like your severance package to include. Some companies offer a lump sum, whereas others provide a few additional pay periods. Other companies choose to continue to provide benefits for a designated amount of time. Another element to consider is how your company will determine how much to give. Some businesses develop severance packages that provide one or two weeks’ pay for every year an employee has worked with the company. Because severance packages are rarely required by law, there is flexibility regarding how to construct them. So the choice is ultimately yours.

  1. Local and federal laws. 

As you create the severance package, it is important to know whether your practices are covered by state and/or federal law. For example, when a company participates in a mass layoff, the layoff may trigger provisions under the Worker Adjustment and Retraining Notification (WARN) Act. Under the WARN Act, if you are an employer with one hundred or more employees and fail to provide the required sixty days’ notice to employees before closing a plant or conducting a mass layoff, you must pay the employees severance for up to sixty days. Some states impose additional requirements regarding severance pay in similar circumstances. As always, check with your local state laws and see how they will impact your company’s severance package. 

  1. Company culture.

If your company is creating a severance package, ensure that it is in line with your overall company culture; even if employee termination is involved and a release is incorporated, the company should maintain its moral and ethical standards. Failure to do so breaks trust, generates negative public opinion, and could, in extreme instances, be used against the company if it is accused of pursuing overly broad waivers. 

Schmit Law Firm is Here to Help

Determining how to structure your severance package can be complicated as you try to balance business objectives with federal and state requirements and overall company culture. You do not have to do this by yourself. Schedule a FREE consultation with us and we will help you craft a severance package that protects your business and honors your company’s standards and legacy. 

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