Severance Pay — Something To Consider

January 10, 2016

Topics: Terminating Employees

Employers are not required to pay severance to employees whose employment is terminated, unless (i) the employer made a written or oral promise to the employee to pay severance; or (ii) the employer has a policy or practice of paying severance.  However, there may be times when providing such a benefit can be in the company’s interests.

When an employee is let go, employers would be prudent to determine whether there was any agreement to make such payments.  For example, the employer and employee may have signed an employment agreement that specifies when severance payments are required.  Such agreements, which are typically with more senior executives, can require severance payments if the employer fires the employee under defined circumstances, unless the discharge is for “cause” as defined by the agreement.  Employment agreements typically do not require the employer to pay severance if the employee resigns, although some make an exception if the employee resigns for “good reason” as defined by the agreement.

The employer may also be bound by its oral promise to an employee to pay severance. The employee would most likely be required to show that, in exchange for that oral promise, he or she accepted the employer’s job offer or agreed to continue working for the employer.

Another situation where the employer may be required to pay severance to a departing employee is if its employee handbook or policies states that it will pay severance to discharged or departing employees.  The written handbook or policy could be deemed as binding as a written contract.

Even without a written policy, an employer may be required to pay severance to an employee if the employer has a history or past practice of paying severance to other former employees who held similar positions.  In addition, when there is a history, then any employee who does not receive severance may claim that the employer is discriminating against him or her on the basis of the employee’s race, religion, gender or other protected classification, or retaliating against the employee in violation of the law if they can distinguish their own class from those who received such payments.

Employers may choose to pay severance as a kindness toward the discharged employee and to improve morale.   There also may be situations where paying severance may be prudent if the termination could be used by the employee as the basis for a discrimination lawsuit.  Employers generally require employees, in exchange for the severance payments, to sign a document through which they agree not to bring any job-related lawsuits against the employer.  Such agreements may also contain other provisions regarding the employee’s actions after their employment is termination.  Any such agreement should be in writing, and should be signed by the employer and employee.  Federal and state laws require very specific language in such release agreements in order for any release of claims to be enforceable.  Employers should consult with counsel in drafting separation agreements and releases, and in determining whether a severance payment may be prudent in a termination.