Should You Offer Severance Pay?
In most circumstances, employers are not legally required to pay severance to fired employees -- but you may want to consider it anyway.
Some employers assume that they have to offer a severance package -- some combination of money and continuing benefits -- to fired employees. In many cases, however, this assumption is incorrect.
When You Must Pay Severance
There are only two situations when you may be legally required to provide severance pay. First, a handful of states require employers who are closing a facility or laying off a large number of workers to pay a small amount of severance. (Contact your state labor department to find out if your state has this type of plant closing law.)
Second, you might be legally required to provide severance to former employees if you led them to believe they would be paid, as evidenced by:
- a written contract stating that severance would be paid
- a promise that employees would receive severance pay as documented in an employee handbook or personnel policies
- a history of the company paying severance to other employees in the same position, or
- an oral promise to the employee that you would pay severance.
Many employers routinely give severance packages to long-term employees who are fired for reasons other than serious misconduct, even if they are not legally required to do so. Why? To soften the blow of being fired and to buy a little insurance against lawsuits. A severance package may help sweeten the sour grapes a worker feels about being fired. And a happier former employee is a less litigious former employee. (For information on requiring an employee to sign an agreement not to sue you in exchange for receiving severance, see Using Severance Agreements to Avoid Lawsuits.)
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