- Good business practice. Mercer data indicates 65% of U.S. leaders are planning for reductions in force in 2023. Offering a quality severance package to employees involved in these layoffs will make the transition smoother and better position the organization down the road.
- The standard severance package. Providing one-to-two weeks of pay per year of service is a standard practice, with management and above typically receiving four weeks or more and executives receiving anywhere from three to 24 months of severance pay.
- Avoid non-competes. While non-disparagement agreements are standard and often advised as part of a severance agreement, non-competes are typically ill-advised unless previously agreed upon with senior-level employees or executives.
- Go beyond pay. Continuing healthcare benefits and ancillary benefits such as robust outplacement services, life insurance and continued access to employee assistance programs (EAP) — all of which can have a significant positive effect on the departing employees.
Numerous large organizations have either started or announced plans to reduce their workforce via mass layoffs to account for changing business priorities amid economic headwinds.
More organizations are likely to follow, as a Mercer survey of U.S. leaders revealed 65% are planning for reductions in force in 2023. For those that do, experts assert that having sound severance package policies and practices in place will make the transition process smoother and better position the organization down the road.
Why Severance?
While providing severance is not a legal requirement at the federal level or most states — Maine and New Jersey are two notable exceptions — it’s generally a good practice to have severance in place when implementing reductions in force.
Ted Hollis, partner at Quarles and Brady LLP, outlined the scenarios when severance could be required:
- A written employment contract/agreement or a collective bargaining agreement may contain a promise of severance pay.
- An employee handbook policy may obligate the employer to pay severance in certain circumstances.
- When there has been an oral promise of severance.
- If there has been a past practice of providing severance.
LaCinda Glover, senior principal, rewards consultant and career practice leader at Mercer, said there are three main benefits to investing in outplacement services/providing severance packages:
- It increases the likelihood of rehiring once laid-off employees.
- It protects the organization’s brand and reputation.
- It mitigates the risk of litigation.
In general, the standard for severance is providing one-to-two weeks of pay per year of service. Those tend to climb to four weeks or more of pay and benefits at the management level and above, Glover said. And executives typically have fixed severance packages, which could be anywhere from three months all the way up to 24 months at the CEO level, she said.
The current state of the economic landscape likely requires that most employers have plans in place for non-executives and non-management personnel. And those that implement mass layoffs of such employees during 2023 without a severance package or outplacement services in place are likely to feel the weight of that decision in the short term and long term.
“Not providing severance is just bad PR and employees are able to bring many types of employment lawsuits as a result,” Hollis said. “There’s also benefits to doing so, as it can create goodwill with departing employees and current employees, and it helps the public image of the company.”
Glover added that “social media is a powerful tool,” and without severance, people can immediately get on a platform and bad-mouth their former employer, while also leaving negative reviews on sites such as Glassdoor or Indeed.
Non-Competes and Non-Disparagement Agreements
A standard with severance packages is some form of a non-disparagement agreement (NDA), which precludes the employee from publicly denigrating the organization as part of the terms.
Hollis provided several key elements that should be included in a severance agreement:
- A release of claims. Certain claims, however, can’t be released, such as worker’s compensation, unemployment, right to challenge under the Age Discrimination Employment Act (ADEA), right to file Equal Employment Opportunity Commission charges or a National Labor Relations Board unfair labor practice claim.
- If the employee is age 40 or over, be sure to follow ADEA requirements.
- Reference check procedure: letters and/or a designated person to whom to submit requests.
- Non-disclosure of company trade secrets or other confidential propriety information.
- Non-disparagement clause or a confidentiality clause as to the disclosure of the severance agreement.
Glover said while NDAs serve as risk mitigation, non-competes are ill-advised in most instances.
“Why would you tie a non-compete to severance? You’re essentially saying that we’re eliminating your job, involuntarily terminating you for some reason and then we’re going to tell you ‘By the way, you also can’t go get another job at a competitor,’” Glover said. “Non-competes just tend to leave a bad taste in people’s mouths when it comes to severance.”
Hollis added that if an employer does enter into a non-compete or non-disparagement agreement with an employee during the course of employment, make sure the severance agreement specifically notes its terms remains in effect.
“Often a severance agreement will include an 'integration clause' which states that this agreement supersedes any and all prior agreements regarding matters relating to employment,” Hollis said. “If you don’t want non-competes or non-disclosures invalidated, you’ll want to carve out language in the severance agreement that keeps those in effect.”
Go Beyond Pay
Severance is typically associated with compensation alone, but many organizations also continue health benefits during the severance period. Less common, Glover said, are the ancillary benefits such as robust outplacement services, life insurance and continued access to employee assistance programs (EAP) — all of which can have a significant positive effect on the departing employees.
Quality outplacement services might include items such as a virtual career center, social network integration, job alerts to job seekers and one-on-one coaching. Glover also noted that continuing life insurance is a low-cost benefit for the employer to continue and it’s a high risk for the beneficiary to be without it during unemployment. Additionally, having access to mental health services is an invaluable resource during a high-stress time.
For employers reviewing their severance packages and outplacement service design, Glover recommends a couple action items:
- Ensure your plan is current. Evaluate the market to make sure the level of severance you’re providing is competitive.
- Gather data from former employees. Determine if the outplacement service you have in place is meeting the needs of people by learning about previous employees’ experience with the service.
- Consider ancillary pieces beyond pay. Health benefits, life insurance, EAPs and outplacement services are important offerings beyond compensation in a severance package.
“A lot of organizations are better prepared because of what happened in 2020,” Glover said. “It’s really about making sure you have a plan in place and having all your ducks in a row so you can act.”
Editor's Note: Additional Content
For more information and resources related to this article see the pages below, which offer quick access to all WorldatWork content on these topics:
