5 Things to Know About Severance Packages

December 6, 2016

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Severance packages may not be the most popular topic because of their association with terminations, but it is an important one for every employee and employer to understand!

The first question is, what exactly is it? A severance package is given by an employer once a long-term employee has been terminated or laid off by no fault of their own. It can oftentimes include a lump sum payment, a period of continued paychecks, the continuation of benefits, or other forms of payment. There are many different types and policies, but the core factors are:

Take these 5 core factors and begin the necessary process of creating or improving your severance package:

1. Establish a Methodology when Creating Severance Packages

Employers must always establish a justifiable reason for laying off their employee and maintain fairness. Executives will come up with an amount agreed upon by HR professionals for how to offer a severance package in relation to the situation. The most popular calculation uses years of service as a factor in determining how much pay is received. The method of calculation used should be explained within the severance agreement that is given, but it is negotiable.

2. Severance Isn’t Always Cash

In today’s world, medical insurance is a primary concern for a lot of people. If an employee becomes terminated it becomes an even bigger worry. However, most employers will offer an agreement to continue their coverage of medical and dental offered through the company. COBRA (Consolidated Omnibus Budget Reconciliation) is a federal law that issues this agreement. If COBRA is elected, the company will continue to pay the employer’s portion of healthcare premiums for the employer continuation period. Be sure to know when these benefits will end and what happens if the employers’ continuation period gets extended.

3. Identify the Reason for the Severance Package

Layoffs may be the most common reason, but it is only one reason why an employer will feel the need to offer a severance package. For example, an employer may feel the need to create a package that will protect intellectual property, limit liability, or avoid bad publicity. It is often a gesture to pay a certain sum of money in order to gain written confirmation from the employee that they will not seek legal action.

4. Severance Pay Isn’t Required

It may be surprising to learn, but because it is not under the Fair Labor Standards Act (FLSA), employers are not required by law to give out a severance package. The only circumstance when it is required is through an employment contract or if an official severance policy has been issued. The only financial compensation a departing employee has the right to is any regular wages left before their termination date as well as any paid time off such as vacation time (but not sick days). Offering a severance package is generally an employer’s gesture to help ease the transition and financial stress of the employee finding a different position.

5. Employers Can Help the Transition

Most companies want to help terminated employees with searching for a secure place of new employment. Employers are oftentimes encouraged to write letters of recommendations, help transfer files of the employer’s computers, and allow continued use of the company email for a period of time. These steps will help increase chances of a shorter unemployment period. There are services that can help with updating resumes, preparing for interviews, searching for ideal companies and networking to get candidates out there.

Severance packages may be important, but they are only a small part of the larger world of compensation consulting. For a complimentary assessment, contact The Overture Group today!


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