What is a severance package?
Severance packages are payments an employee receives after being let go, laid off or furloughed from their position. They come in various forms, from a lump sum of compensation to a continuation of health benefits to a retirement plan extension. The employee receives the severance package for a predetermined period after they’re let go. It helps an employee maintain a healthy financial status during their job search.
Benefits of offering severance pay
Letting employees go is never easy, but a severance payout can make it a little easier. There are many benefits to offering severance pay for both the employer and the employee. A few of these benefits include:
- Positive employee relationships: Severance packages are a gesture of goodwill to employees. They’ll appreciate the compensation for their time and the inconvenience. This keeps employees on good terms with your company, which means they could be an easy hire when you’re ready to expand your workforce again.
- Improved workplace culture: When you offer severance pay, the remaining employees will notice how you handle the workforce reduction. It can improve the company culture by showing them that you’ll take care of them even when you have to cut staff.
- Brand reputation: Severance packages can protect your brand reputation. The public often hears about companies that lay off employees. Knowing you offered a severance package to the departing employees can make a good impression on your customers, future applicants and the public in general.
- Financial stability for employees: Unexpected layoffs or furloughs could negatively affect employees’ and their family’s health and well-being. Offering a severance package shows them you care about their financial stability. It helps them take care of themselves and their families until they find work elsewhere.
- Rewards for contributions: Some employees who contribute years of their time and energy to a company may still be let go or laid off. Show your gratitude and appreciation for their dedication by offering a generous severance package.
- Voluntary departures: Choosing which employees to let go of can be challenging. Voluntary severance pay can encourage employees to offer to leave. The voluntary severance package can motivate someone to resign or retire without you having to choose. It can also help employees who really need the job to retain their positions.
- Compliance: In some cases, you might be required to offer a severance package. While the Fair Labor Standards Act (FSLA) doesn’t require severance pay on the federal level, some states require severance pay when you close your facility or lay off a certain number of employees. Check state labor laws to find out if this applies to you. An employment contract might also require you to pay an employee severance pay.
- Preventing legal action: You can ask employees who receive severance packages to sign an agreement that they won’t pursue legal action. This could save you money if you think an employee might try to sue you.
- Protecting proprietary information: You can also make a nondisclosure agreement part of accepting the severance pay. This can help you protect your proprietary information by preventing departing employees from sharing it.
Overview and examples of what a severance package offers
The compensation and benefits provided to employees through a severance package often vary depending on the company. Elements of typical severance packages often include:
Pay
Most employers include severance pay in their packages. How is severance pay calculated? It’s usually based on the employee’s salary. The typical severance pay employers provide is one to two weeks for every year the employee worked, but the employee’s rank can play a role in how much you offer. Upper management employees might get a higher severance pay amount, for example.
Insurance
Many severance packages also include health insurance coverage for a specific amount of time. The Consolidated Omnibus Budget Reconciliation Act requires employers to temporarily continue their employee’s health insurance plans for at least 18 months after being let go. Though you’re required to extend the coverage, you most likely don’t have to pay for the employee’s health insurance under COBRA coverage. However, you might consider paying for part or all of their healthcare until they find a new career opportunity to stay on good terms with the employee.
Retirement and pension plan
Some employers let their employees keep contributing to their retirement plan if they receive severance pay. Employees are usually entitled to getting their retirement plans transferred over to them when they finish with the company.
Job search assistance
A great option to offer employees in their severance package is funding for a job search service. This service works with the employee during their unemployment period and helps them find a role well-suited for their skills, interests and experience. Most of these services offer a variety of job search assistance opportunities, including resume creation, mock interviews and job search training or courses.
Other perks and benefits
Your severance package could include additional company perks for employees, such as extending the use of a company car, letting them keep their work laptop or allowing them to sustain their company gym membership.
Related: The Fundamentals of Human Resource Management: A Guide
Tips to determine if your company should offer severance pay
Offering a severance package comes at a cost for your company, so you might hesitate to provide this option. Follow these tips to help you determine if offering severance pay is the right option for your company:
Establish your budget
Before you determine how much to offer employees, you’ll need to figure out if your company can afford it. Work closely with your accounting and finance teams to learn how much your company can offer its employees if they’re let go. Factor seniority into your total, as many employees expect to receive more pay if they’ve been with the company longer.
Consider your values and company reputation
Offering severance pay makes your company look generous and proves you care about your employees’ well-being. If your employee value proposition states how much you care about employees, providing severance pay is an effective way to support that statement. Severance pay also helps build your company’s reputation and brings in quality employees who want to make sure they’re working for a generous and reliable company.
Determine your company’s resources
If after determining your budget you learn that you’re unable to offer competitive severance pay to employees, think about other resources you’re able to provide employees. If you can afford to pay for career counseling or their health benefits, offer this in addition to or in lieu of severance pay. Providing this additional support proves you’re doing what you can to help your former employees while they’re looking for new employment.
Frequently asked questions about severance packages
Do companies have to give severance pay?
Companies aren’t usually required to give their employees severance pay in most cases, but it helps organizations build their reputation, and it shows they care about their employees’ well-being after their removal from the company.
Can employees collect unemployment if they receive severance?
Whether employees are allowed to collect unemployment while receiving severance pay typically depends on laws in their respective states. Some states let employees receive both severance pay and unemployment at the same time, while others only let them earn unemployment wages after their severance period has ended.
Do employees have to accept severance packages?
Employees aren’t obligated to accept severance packages as you offer them. However, rejecting the severance package doesn’t mean the employee gets to retain their position. You can still let employees go based on the labor laws in your state. Employees can reject the package outright or try to negotiate a better deal. Negotiating with an employee can improve your reputation and leave things with the employee on better terms if you can afford higher severance pay or more benefits.
What is a lump sum severance?
A lump-sum severance is a one-time, upfront full severance payment made to an employee. It’s provided to them on the agreed-upon date, rather than giving them payments over the upcoming months or weeks that add up to the full payment.
Offering a severance package is a great way to show employees that you care about their work contributed to your company. Collaborate with your team to ensure offering a severance package is the best option for you and your employees.
