Severance Pay

A one time payment some employers provide when terminating an employee.

Many employers provide severance pay – a one time separation payment when terminating an employee. Severance pay makes sense. It is a humanitarian gesture and good public relations. In addition, most managers expect employees to give them one or two weeks notice if they plan to quit, so it seems appropriate to provide a few weeks’ severance pay when dismissing an employee. Avoiding litigation from disgruntled former employees is another reason. Severance pay plans also help reassure employees who stay on after the employer downsizes its workforce that they’ll receive some financial help if they’re let go, too.

For whatever reason, severance pay is common. In one survey of 3,000 human resource managers, 82% of responding organizations (ranging from 66% for every small firm to over 90% for larger firms) reported having a severance policy. Just about all full time employees of old economy US companies (such as steel and autos) and about half their part time workers are eligible for severance pay.

The reason for the dismissal affects whether the employee gets severance pay. For example, about 95% of employees dismissed due to downsizings got severance pay, while only about a third of employers offered severance in cases of termination for poor performance. Those who quit or are dismissed for cause rarely get severance. About half the employees receiving severance pay get lump sum amounts; the others receive salary continuation for a time. The average maximum severance is 39 weeks for executives and about 30 weeks for other downsized employees. Severance pay at the rate of one and one half of severance pay for each year of service seems about average.

Severance Pay and ERISA

While federal law generally doesn’t require severance pay an employer could well find its voluntary severance plan covered by ERISA rules. Whether the plan becomes subject to ERISA depends on two things. If the employer has a legal obligation (for instance under a union contract) to make severance payments then the plan comes under ERISA. Second, a voluntary plan could come under ERISA if the employer identifies if (for instance in employee handbooks or even by verbal assurances) as a plan or program established or maintained by the employer.


In any event, there are several things to keep in mind when crafting the severance plan. These include:

Cover the situations for which the firm will pay severance, such as layoff’s resulting from internal reorganization Indicate that action regarding other situations will be determined by management is necessary.

Require signing of a waiver / general release prior to remittance of any severance pay, absolving the employer from employment related liability. Note that to be an effective release the signing of the release must be knowing and voluntary and there are additional legal requirements.

Reserve the right to terminate or after the policy

Make it clear that any severance payments continue until the deadline, or until the employee gets a new job whichever occurs first.

Remember that as with all personnel actions, the employer must take severance payments if any equitably.

Supplemental Unemployment Benefits

Provide for a guaranteed annual income in certain industries where employers must shut down to change machinery or due to reduced work. These benefits are paid by the company and supplement unemployment benefits.

In some industries such as auto making, shutdowns to reduce inventories or change machinery are common and lay off or furloughed employees must depend on unemployment insurance. Some companies pay supplemental unemployment benefits. As the name implies these cash payments supplement the employee’s unemployment compensation to help the person maintain his or her standard of living while out of work. They generally cover three contingencies layoffs reduced workweeks ad facility relocation.