Severance pay is money that an employer might want to provide for an employee who is leaving their employ. Normal circumstances that can warrant severance pay include layoffs, job elimination, and mutual agreement to part ways, for whatever reason.
Severance pay usually amounts to a week or two of pay for each year the employee supplied service to the company. For executives, the severance pay may even constitute up to a month's pay for each year of service. For senior positions, severance pay may be dictated by an employment contract. In some instances, a severance package might also include extended benefits and outplacement assistance.
What Is an Employer Required to Pay?
No law requires an employer to pay severance pay. The Fair Labor Standards Act (FLSA) requires that an employer pay an employee whose employment has been terminated their regular wages through their completion date and for any time that the employee has accrued.
This normally includes accrued vacation time, but not normally sick days. Unless the employer is obligated to pay by an employment contract or by a severance policy stated in the employee handbook or elsewhere in writing, severance pay is totally up to the goodwill of the employer.
**Because of the way unemployment compensation is calculated, in most states, paying the severance in a lump sum during one weekly paycheck may be in the employee's best interests. This reduces the unemployment compensation in the week it is paid, but enables the employee to collect the full amount going forward. If the severance is paid weekly over time, the unemployment compensation will be reduced each week.**
Negotiation and Severance Pay
An employee may attempt to negotiate more salary and benefits than the employer offered in his or her severance package. In doing so, technically, the departing employee has turned down the employer's offer. This does legally allow the employer to offer no severance pay. As such, assuming you are asking the employee to sign a release of claims in return for the severance pay, the attorneys at Sutton Law, recommend you tell the employee that the offer is not negotiable (especially if you are laying off other employees). However, you can negotiate, especially in circumstances where there is no written company policy, no past practices exist, and/or no promises in an employee handbook have been made.
Require a Release From All Claims in Return for Severance Pay
In return for severance pay, you should require that the employee sign a release that frees you from all potential law suits in the future. Without severance pay, there is no reason for an employee to sign and release you from all claims. Obtaining the release is important in a world in which anyone can sue you at any time for any reason - or no reason at all.
** Remember to obtain a separate release from employees who are over age forty (40) that includes a release from age discrimination suits. Adhere to the timeline required in your state and country, too. In Michigan, as an example, the employee has twenty-one (21) days to decide whether to sign the release and accept the severance pay. Once signed, the employee then has an additional seven (7) days during which he or she can renege.**
Other Thoughts on Severance Pay
To provide severance pay to a departing employee is both kindness on the part of the employer and a legal necessity in this era of law suits. Since many times a person's employment is terminated through circumstances external to their work, the provision of severance pay is a positive and supportive gesture. The departing employee receives pay that will supplement his or her unemployment compensation and cushion his or her standard of living while job searching. The payment of severance pay is also viewed as a positive gesture by remaining employees.
For questions concerning your obligations concerning offering severance pay, call Sutton Law at 859-578-6600. You owe it to yourself to speak with a professional, experienced lawyer that will help you with all your severance agreement questions.
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