Severance pay is a fact of life in business. According to the Society for Human Resource Management (SHRM), about 97 percent of U.S. businesses report that they offer some form of severance to their employees.
What is Severance Pay
Severance pay is compensation offered to employees who generally are being let go or laid off through no fault of their own. Severance packages can also be offered to employees who resign, retire, and even those who are fired if a company chooses to do so. Compensation can include a designated amount of salary, payment for unused vacation time, unused sick time, a continuation of health insurance, payment of retirement accounts, awarded stock options, and outplacement assistance.
When Do Companies Offer Severance Pay
Companies generally plan for severance pay in the possible future case of future layoffs, downsizing, restructuring, merger, acquisition, or company relocation. Severance protects companies because agreements must generally be signed by employees stipulating that employees will not bring legal action against the company if they accept a severance package.
Companies also offer severance pay and compensation packages because it is seen as the right thing to do to attract and keep workers as a promise to protect them financially in the face of unexpected challenges. Severance packages can be used by employees as a protective cushion when a job ends.
Do Companies Have to Give Severance Pay
The Fair Labor Standards Act (FLSA) stipulates that employees don’t have a legal right to receive severance pay from an employer unless it was promised in an employment contract, stated in the employee handbook, or verbally promised to an employee.
Severance pay is generally not offered to employees who are separated from a company due to low-quality work, late/poor attendance, theft, insubordination, harassment or other unwelcome behaviors, and poor representation of the business. Companies don’t generally offer severance to employees who resign or end their employment voluntarily.
It is a company’s discretion whether to provide severance, what type of severance to provide, who receives it, and under what circumstances. There is no standard severance amount although general considerations include the size of the company, how long an individual has been employed, and an employee’s position and rank.
Key Severance Pay Questions Answered
First, it is a good idea for every employer to have a solid severance policy that will apply to all employees.
Second, severance pay is treated by the IRS as regularly taxable income.
Third, the laws regarding unemployment and all severance payments and benefits vary by state, so it is critical to check with a local employment office when attempting to apply for unemployment benefits.
Fourth, can everyone be terminated? Yes. All 50 states and the District of Columbia have “at will” conditions, meaning that a company can terminate any employee at any time without giving a cause as long as the termination is neither discriminatory nor illegal. However, when doing business with unions, there are often more stipulations to employee termination.
Advantages and Disadvantages of Severance for Companies
The advantages to a company that offers severance are the sense of goodwill and positive reputation that accrues to a company. When terminations are handled in a professional manner along with a severance package, that can prevent an employee from ruining a company’s reputation.
The disadvantages of severance are that issuing severance packages can make a bad financial condition worse if a company is struggling. Additionally, the administration of severance packages including making salary payments and administering health and other benefits comes with a cost.
Getting Outsourced Payroll and HR Services
With the complexity of handling payroll and HR services, it’s wise to seek qualified outsourced assistance to help prevent legal and other problems. Protect your business and your employees by hiring a professional to take care of your payroll needs.
Choose an Outsource Payroll Service to Assist You
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