Best Practices When it Comes to Crafting Severance Packages

Parting ways with an employee who has been with your company for several years or longer can be unpleasant and uncomfortable. A well-thought-out severance package can soften the blow for the employee and help your business avoid legal claims and a damaged reputation. With the difficulty many industries are experiencing in recruiting, hiring, and keeping top-quality personnel, a fair severance package is necessary to stay competitive.

A Maryland business attorney can help you draft the documents you need and brainstorm with you or your human resources department about the best practices for crafting severance packages. Thinking about potential pitfalls and developing a solid strategy can make the layoff process less stressful for everyone involved.

Negotiate, Don’t Dictate

Employees who are already stressed about losing their income and benefits do not want to feel even more powerless, so you do not want to hand them a “take it or leave it” severance package. Refusing to negotiate in good faith with an employee when laying them off will give your company a reputation as a toxic workplace.

You do not want to start with a lowball offer because many employees will feel too intimidated to negotiate. They could, however, feel comfortable sharing the details with others, which could damage your company’s reputation. It is one thing to be cutthroat when negotiating outside business deals and quite another to approach severance package negotiations that way. When offering terms to someone who has served your company for years, the best practice is to start with a fair offer that includes a little wiggle room in several areas.

Check the Contract

The employment contract with the individual employee, the collective bargaining agreement, or the law that applies to your industry might include terms you must follow in your severance package or in the layoff process. Be sure to review those items carefully before taking any action or drafting a proposed severance agreement to make sure you are adhering to employment law requirements.

Even if you do not have to offer a severance package to your employees at layoff time, think of severance packages as an investment in your company’s future. It will be much harder to get the best people to sign on at your workplace if previous workers feel cheated or disrespected. Also, thanks to online worker rating websites like Glassdoor, nothing is secret anymore.

How Much Severance Pay Is Standard?

Industries vary widely, and the employee's rank can impact the amount of severance pay as well. Depending on those factors, if there is no contract controlling severance packages, employers often offer the worker one or two weeks of severance pay for each year they worked for the company. Still, with typical severance packages, the employee will generally counter with a request for four weeks of pay per year for the amount of time they worked.

Higher-level workers in management and executives often get a higher amount. Sometimes, the severance pay is tied directly to rank rather than time worked. For example, a middle manager might get paid for one year, regardless of whether the employee worked for the company for three years or thirty.

You have multiple options regarding how to pay out the severance pay. If the employee has concerns about your company’s financial stability, they might ask for a lump-sum payment. However, there can be tax advantages to receiving the severance pay over time instead of a lump sum to avoid getting bumped into a higher tax bracket.

Extending Insurance Coverage 

An employee who has sufficient savings and expects to land on his feet or start his own business might be less concerned about severance pay and more concerned about continuing health insurance and other forms of employer-provided insurance like life and disability insurance coverage. Thanks to the Consolidated Omnibus Budget Reconciliation Act (COBRA), your laid-off workers can extend their company group health insurance for 18 months and sometimes longer.

COBRA premiums are expensive for a laid-off worker who does not know when the next paycheck will arrive because the former employee typically has to pay their portion and your part of the premiums.

Consider offering to pay the employer portion of the COBRA for a specific number of months or until they become no longer eligible for COBRA insurance extension.

The employer’s portion of the insurance premiums is often higher than the worker’s portion. You could think about paying the entire premium as one of those “wiggle room” items. Relative to other items in the severance, this possible perk could buy your company much more goodwill than it costs.

Outplacement Services

Offering to pay for an outplacement service for your laid-off employees will send a clear message to them and the general public that you care about your workers and want the best for them. You will want to be clear about the kinds of services you will cover and how long you will provide the services. You could choose an outplacement service or let the individual worker select an agency.

Paying for Additional Credentials

Some corporations offer tuition reimbursement if a laid-off worker wants to finish a college degree. With student loan debt being in the public eye, tuition reimbursement can be an attractive part of a severance package. This perk could also score your company massive points in future recruiting. 

Company Equipment

Some workers do not own a personal computer or other equipment because they use the company-provided laptop, particularly if they are remote or hybrid workers. The market value of used office equipment is much less than what your company paid for the items.

If any employee asks to keep specific equipment, consider doing so as a negotiated term of the severance package. You will want to remove all proprietary information from the computer. Also, remove productivity or performance monitoring software, also called “bossware,” to avoid legal problems like invasion of privacy claims.

Other Company Perks

If your company allowed the worker to use a company vehicle, they might not have another car to use immediately. Letting the former employee continue using the company car for a little longer until they can arrange a new form of transportation could be a valuable bargaining chip. Just address the auto insurance, maintenance, and liability issues.

A few extra months using the company’s health club or similar memberships can instill goodwill among the workers losing their jobs. Also, having access to these social opportunities could help them obtain their next job, reducing the amount of their unemployment claim.

Company Stock and Retirement or Pensions Plans 

Your company policies and state law will control these subjects. Be sure to talk to a business attorney about handling these issues in your layoff process and severance package.

People want to feel they left the negotiation table as winners. If you have leeway on these topics, you might want to prepare several options to use as bargaining chips in the negotiations. Usually, companies can find relatively inexpensive ways to structure options on company stock. 

Communication Plan and Announcing Departures

No employee should have to hear about possible layoffs through office gossip. As soon as your company decides to lay off some workers, there should be a clear plan about what will get communicated to whom and when.

Some employers are afraid to be transparent with their workers because people they want to stay on board may leave. You will likely lose some of your best employees by not telling them what is happening. Uncertainty can cause some of your most-desired employees to work for your competitors. The people who can easily land another job are often their top workers.

The best time to announce departures is after reaching an agreement on severance packages. You will want to be clear about the anticipated date for the announcement with the people you are laying off so they will know what to expect.

After the employer and employee reach an agreement as to what you will include in the severance package, you will want to memorialize the terms in writing in a binding contract. Besides the detailed terms of the agreement, you might want to stipulate that the employee agrees to those terms, waives the right to sue the company, and was not wrongfully terminated. You will also want to address the issue of any non-compete agreements.

Recommendation Letters

Assuming your employee did their job well and had a positive history of performance reviews, you might want to consider providing a letter of recommendation before starting negotiations on the severance package. The recommendation letter should be based on the work they did for you. The letter should not be used to scare them into accepting the severance package as is instead of negotiating with you. Providing the letter upfront will give you points as a fair boss. 

Unemployment Benefits

A worker cannot collect unemployment benefits if they voluntarily walk away from their job. Some employers try to avoid having an unemployment claim by making employees so miserable they quit instead of going through the proper procedures of negotiating a severance package and laying off the worker. A company that engages in those tactics can expect its reputation to suffer.

A Maryland Business Attorney can provide the legal advice you need while crafting severance packages. Contact Thienel Law today to learn more.