Paying severance money to terminated employees is standard practice with many companies. Many other companies, however, elect not to pay severance, or choose not to pay severance when terminating a problem employee (as opposed to a good employee).
Absent an agreement, typically there is no requirement to pay severance money to departing employees. Still, there may be good reasons to do so. This edition of the HR Law Insider discusses (1) when severance pay is required; (2) when severance pay is advisable, albeit not required; and (3) protecting your company when paying severance.
WHEN SEVERANCE PAY IS REQUIRED
Severance pay is required when a company has an agreement with an employee(s) to pay it. Failure to pay can expose a company to a breach of contract claim as well as a claim under Arizona’s treble damages statute (many other states have similar statutes).
Under Arizona’s wage statute, “wages” means:
Nondiscretionary compensation due an employee in return for labor or services rendered by an employee for which the employee has a reasonable expectation to be paid. Wages include … severance pay … and other amounts promised when the employer has a policy or a practice of making such payments.
A “reasonable” expectation of severance pay can arise from an agreement to pay or from a policy or practice of always paying it. Therefore, unless an employer wishes to pay severance, it should advise employees that it is not a company policy or practice to pay severance to departing employees — but the company reserves the right to do so if it elects.
WHEN IS SEVERANCE PAY ADVISABLE, ALBEIT NOT REQUIRED?
Even when it is not required, paying severance should be considered under the following circumstances:
- To reward loyal and productive employees;
- To help employees bridge the financial gap while looking for their next job;
- To reduce and/or eliminate the chance of an EEOC claim or lawsuit; and
- To foster future cooperation and good will.
An employer wishing to obtain the benefits of reducing or eliminating claims should enter into a written severance agreement with a departing employee.
THE SEVERANCE AGREEMENT: PROTECTING YOUR COMPANY
A severance agreement is a simple and effective way to make sure that your company will not pay money to a departing employee, only to have the ex-employee turn around and sue the company for an alleged past slight.
BEFORE your company agrees to pay severance to a departing employee, it should advise the departing employee that payment is conditioned on the company and employee entering into a severance agreement, which will contain a number of terms, including a general release. DO NOT first promise to pay severance and then later place a severance agreement on the proverbial table; arguably, by then it is too late — your company has given the employee a reasonable expectation of payment without the burden of a severance agreement.
A severance agreement should be tailored to the particular situation and employee. Beware form agreements, which may contain terms that either invalidate the agreement or that are missing terms necessary to effectuate the agreement. Moreover, form agreements often lack terms that, while not mandatory, can substantially benefit a company (e.g. a cooperation provision if the company might need the ex-employee’s help in the future on a business or litigation issue; a confidentiality or non-disparagement provision for a difficult employee).
Employers must first determine whether they are obligated to pay severance; if so, they should be prepared to pay — potentially as early as seven days after terminating an employee. Under Arizona’s wage statute: “When an employee is discharged from the service of an employer, he shall be paid wages due him within seven working days or the end of the next regular pay period, whichever is sooner.”
If an employer is not obligated to pay severance pay, it should nevertheless consider doing so for the reasons articulated above. If the employer decides to pay severance, in most instances it should obtain a signed severance agreement before payment.
Particularly in high risk terminations, employers should contact legal counsel to: (1) develop a strategy to handle the situation: (2) determine how to communicate the decision to the employee; and (3) draft a severance agreement that the employee will sign, that complies with the law, and that provides the maximum protection to the company.
The movie “Up in the Air” demonstrates how difficult employment termination meetings can be and how they can be managed with careful planning and execution. If only life were this easy (caution: language):