Severance Package

What is a severance package?

A severance package is a financial compensation and other benefits offered to an employee who was terminated due to business reasons. For example, the employee may have been laid off because of overstaffing or displaced due to a merger.

In the United States, the Fair Labor Standards Act (FLSA) states that companies do not have to provide a severance package to all employees. However, under the Worker Adjustment and Retraining Notification (WARN) Act, larger companies may be required to offer severance pay if they don’t give at least 60 days' notice before a mass layoff. 

To receive a severance package, an employee signs a legal document called a severance agreement. When signing this document, an employee makes certain concessions, such as waiving the right to sue for wrongful termination or discrimination. A company might ask the worker to sign a confidentiality agreement as well. 

The amount of money the worker receives as severance pay is often contingent upon the length of time they spent with the company. Other benefits in a severance package include health insurance, life insurance, company car usage, and job placement services.

Offboarding software helps businesses create severance packages with customizable legal templates. Such digital tools can also streamline the employee exit process.

Severance Package Software

Software, die severance package als Funktion oder Begriff erwähnt.

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Basic elements of severance packages

The contents of a severance package will vary from company to company. For instance, organizations can determine the amount, length of pay, and benefits extended to their former employees. 

The following elements are commonly included in a severance package:

• Wages: The amount of money dispersed varies but is often tied to the length of time an employee worked for the company. Many businesses choose to pay one to two weeks of wages for each year of service. For example, if an employee was with a company for four years, they may receive four to eight weeks of wages. Some employers choose to pay this as a lump sum, while others pay in installments. These details can be coordinated using compensation management software.

• Health insurance: In the U.S., companies with at least 20 employees must allow terminated workers to stay on the company health care plan. While they do not have to cover a percentage of the cost of the premiums, many employers extend this offer as part of the package.

• Vacation pay: Often, terminated employees have accrued unused vacation days. Companies will sometimes offer to pay this out at a set rate per each remaining day.

• Outplacement services: Some organizations offer job placement help to employees who have been laid off. The company may subcontract an agency that helps workers polish their resumes, hone their interview skills, and look for suitable jobs. This is especially helpful to long-term employees who have not had to seek employment in years.

Benefits of offering severance packages

While severance packages hold clear advantages for employees, they can also benefit companies. Offering a severance package during employee offboarding:

• Protects brand reputation. A severance package can leave employees with a more positive impression of the organization on their way out. An employee who feels supported is less likely to tarnish the company’s reputation on social media or other sites.
• Improves morale among workers. Layoffs and company mergers can be stressful on all employees, not just the ones being let go. When other workers see laid-off employees treated compassionately, their morale can increase. They see proof that they work for a company that cares.
• Reduces the threat of legal action. Employees must sign a severance agreement to receive their parting wages and benefits. This agreement usually includes legal documents that require employees to waive their right to litigation, granting the company a degree of protection.
• Protects confidential information. Employees often sign confidentiality and non-compete forms as part of their severance agreement. This ensures that the company’s proprietary info and strategies are kept away from competitors.  

It may seem counterintuitive, but offering severance packages can save money. By protecting the brand’s reputation, reducing turnover, and avoiding litigation, a company can mitigate future costs.

Severance packages best practices

When creating a severance package, a business should consult with its legal, accounting, and human resources teams. Together, team members will want to follow several best practices, including:

• Plan ahead. Make sure policies and packages are created well before it comes time for layoffs. Know the purpose for offering severance, create a plan, and convey that plan to all workers ahead of time.
• Consider eligibility. Think about whether all employees are eligible. For example, some companies only offer severance to full-time employees. 
• Investigate applicable laws. There may be instances in which a company is required to offer continued wages to workers. It is important to know about federal, state, or local laws regarding agreements employees must sign.
• Get feedback. Consider creating a survey to give outgoing employees about their exit experience and how well the severance package met their needs. The company will then be able to adjust the plan moving forward.