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Thursday, February 18, 2010

Understanding Severance

Since the 1930s, employees have acquired more legal rights as federal and state governments enacted laws giving them the right to unionize and engage in collective bargaining, to receive a minimum wage and extra pay for overtime work, and to be protected from discrimination based on race, religion, gender, or disability. However, the employee protection laws have a serious gap; with the exception of the right to maintain health insurance coverage under the provisions of COBRA, employees do not have any rights to income after termination.

Labor laws in virtually all European countries - and many other countries around the world - specify that an employee is entitled to payment if he is involuntarily terminated. The few exceptions which exist concern termination for gross cause, usually defined as criminal acts or breaches of fiduciary duty.

In the U.S., however, legal protections covering severance are far more limited in scope. There are no provisions in the federal Fair Labor Standards Act that require compensation for severed workers.  As a general rule, employees who lose their jobs are not entitled to severance payments unless the terms of severance are spelled out in an employment contract. A limited exception exists in the Worker Adjustment and Retraining Notification Act (WARN), that provides for advanced notice or pay in lieu of notice under certain conditions. WARN does not cover all employers or most termination scenarios.

However, workers who have lost their jobs may be able to demand severance if the company has traditionally provided severance to terminated employees. While an employer is free to change policies (with certain limitations), if there has been a written policy or oral statement that terminated employees will receive severance, a strong case can be made that such a commitment constitutes a binding agreement.

For example, a client of mine was terminated due to a company restructuring. His employer had a history of providing two weeks of severance per year of service (a pattern of practice). However, my client was provided with only one week of severance per year of service, which the company justified as reasonable due to its financial condition. We challenged this on several grounds, including the fact that the company's President had stated six months earlier that company benefits would be continued despite the economic climate.  Ultimately, my client received the correct severance package.

Employers should review any statements regarding severance that can be found in employee handbooks.  Oral statements, written memos, and even casual emails should be analyzed to see if commitments have been made.

A written severance policy should be drafted. The policy should consider the following questions:

• Do we want to have any severance provisions? If so, how much severance should be offered? How should it be calculated (e.g.length of service? Rank in the company?)
• If severance is granted, which workers are eligible?  Only those working full time?  What about long-term part-time workers?
• How long does an employee have to be on the job to be eligible for severance?
• Is there a cap on the duration of severance?  For example, six months regardless of length of service?
• Will any severance compensation be paid out as a lump sum or over time?
• How do severance payments affect eligibility for unemployment insurance claims?

Terms of severance involve more than payment of wages or salaries for a specified time after termination. Severance policies should also cover payment for unused sick leave as well as other benefits. In some cases, the company may decide to offer outplacement services to a severed employee, including career counseling and assistance with resume preparation. Workers are often asked to sign an agreement not to sue for wrongful termination in return for receiving severance benefits.  Non-compete clauses may also be part of a severance agreement.

It is important for employers to retain experienced employment counsel when drafting severance provisions for employee handbooks or in crafting severance agreement language.

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