There’s an obvious difference between terminations for economic reasons and those that are necessary to insulate your business from a problem employee. This difference will be most apparent when you are negotiating the terms of separation. When you are laying off an otherwise-valued employee as a cost-cutting measure, it makes sense to lay the groundwork for that employee’s rehiring when business improves.
Usually, an open conversation is enough to communicate that message. In some situations, you may want to keep that person involved as an independent contractor. If you do, it’s important to understand the legal distinctions between an independent contractor and an employee. Otherwise, you may become liable for that person’s former salary and benefits.
COBRA coverage and other benefits
Laid-off employees are entitled to continue receiving certain fringe benefits. If you employ 20 or more people (or fewer in some states), then – under a federal law called COBRA – you are required to provide continued access to any group health plan you may offer. The exception is if you terminate the employee for gross misconduct.
Of course, employees are entitled to receive vested benefits that they may have accrued, if you provide a company retirement plan. You are also required by law to inform the employee of potential eligibility for unemployment insurance benefits.
However, you are not required to offer a severance package – unless it is part of your employment policy or appears in an employment contract.
Older Workers Benefit Protection Act of 1990 (OWBPA)
The Older Workers Benefit Protection Act of 1990 (OWBPA) is an amendment to ADEA, the age discrimination act, and it’s actually employer-friendly. It’s designed to help you negotiate win-win severance terms with the employees you are laying off.
There are two major provisions. The first one recognizes that, actuarially, retirement and medical benefits for older workers are worth more than those for younger employees. Prior to OWBPA, any cut in these benefits could have been construed as discriminating against older workers. For example, suppose you had matched employee contributions to a 401 (k) plan at 50 cents on the dollar, but needed to cut that back to 25 cents. You could have been charged with age discrimination because older employees tend to earn more, and contribute more. OWBPA added protection for employers as long as the out-of-pocket cost of providing the benefit is the same across all age groups.
The second provision addresses the fact that many employers only offer severance packages (or enhanced packages) to employees who agree to sign a waiver of discrimination claims. In other words, the terminated employee agrees not to sue for discrimination in exchange for a severance benefit. Since many “voluntary layoffs” provide this type of deal for older workers, the EEOC stepped in to set some ground rules. OWBPA affirms that the practice is legal and employers cannot be sued. This is true as long as the package itself, the language of the contract and the employee’s freedom to consider it properly, all meet specific criteria.