Should You Offer Severance Pay?

You may want to consider paying severance, even if it isn't legally required.

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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 Nolo's article Using Severance Agreements to Avoid Lawsuits.)

If you decide to pay severance, the most important rule is to be consistent. The amount of severance can vary depending on how long the employee has worked for you and the employee's job category. But be sure to treat your employees equally. If you are evenhanded and uniform in paying severance, you are less likely to face claims of discrimination (for example, that men received higher severance pay than women).

What to Include in a Severance Package

There are no hard-and-fast rules about what constitutes a severance package. The idea is to ease the burden on the fired employee. To this end, you might want to consider including any or all of the following benefits:

  • Pay. Realistically, this is what is most important to your employees. Many employers pay a set amount -- a week or two of salary -- for every year of employment.
  • Insurance benefits. Some employers offer to pay for continuation of health, life, or disability insurance coverage for a period of time after an employee is fired. Although a federal law called the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires some employers who offer group health insurance to offer their employees the opportunity to continue their coverage, it does not require employers to foot the bill. (For an explanation of COBRA, see Your Rights When You Leave a Job.) Many states also have health insurance continuation laws, and a few of them require some employers to pay for a short period of continued coverage. To find out about your state's rules, contact your state insurance department.
  • Uncontested unemployment compensation. Fired employees can claim unemployment benefits if they lost their job for reasons other than serious misconduct. After an employee applies for benefits, the employer has the opportunity to contest the employee's claim. If you don't contest an employee's claim, it is much more likely that the employee will receive benefits.
  • Outplacement services. An outplacement program is designed to help an employee find a new job. It may offer counseling on career goals and job skills, tips on resume writing, leads for potential jobs, practice interview sessions, and help in negotiating with potential employers.
  • References. You might agree to come up with a mutually agreeable letter of reference for an employee to use in job hunting. But proceed with caution here. Providing references carries some possible risks. To learn more, see Nolo's article Giving References for Former Employees.
  • Other benefits. Certain benefits or items may be particularly important to a departing employee. If possible, have an honest discussion with your worker to find out what he or she would like in a severance package. You might want to consider allowing the employee to keep advances or money paid for moving expenses, letting an employee keep equipment (such as a cell phone or computer), or releasing an employee from contractual obligations, like a covenant not to compete.

For help in creating and documenting a severance policy and other personnel policies, get Create Your Own Employee Handbook: A Legal and Practical Guide, by Lisa Guerin and Amy DelPo (Nolo).

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