Severance Packages - Yes? No? Maybe?

It seems unlikely that you’d fire someone for cause – and then offer a severance package. But you never know.
Severance is designed to create at least a modicum of residual good will with the person you’re letting go. When it’s a case of seasonal layoffs or across-the-board downsizing due to economic reasons, employers often want to encourage employees to return – next season or when the business cycle improves. Providing severance pay, or the opportunity for part-time work as an independent contractor, are typical incentives.
If you’ve hired someone using an employment contract that specifies a severance benefit, then of course you are legally bound to respect the terms of the contract. Also, if you have a company-wide policy that promises severance, you are committed to paying it.
But if you are an at will employer and have not made any written or implied commitments, there is no legal requirement to pay severance to a terminated employee. There is a significant exception – and this is the “maybe” in the title: Some employers will negotiate with a terminated employee to pay severance in exchange for a signed release wherein they promise not to sue.

Game Plan

  • The DOL has a page that purports to explain how severance pay is calculated. In fact it’s pretty simple and no calculator is needed. The website explains: “There is no requirement in the Fair Labor Standards Act for severance pay. Severance pay is a matter of agreement between an employer and an employee (or the employee's representative).”
  • The legal encyclopedia site offers a good overview of the severance issue, though most of the discussion pertains to valued, long-term employees who have earned it.
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