Disclaimer
State who is eligible to receive severance pay.
State the instances when an employee forfeits rights to severance pay (i.e., fired for misconduct).
State the amount of severance pay an employee can earn.
State the manner in which severance will be paid, including time intervals, waiting periods, and percentages.
State if the severance is guaranteed or paid at the discretion of the employer.
Severance pay is not required by law. However, some employers obligate themselves contractually to pay severance when employees are terminated. Severance pay is usually based on an employee's length of service with the company and is specified in the company policy.
Employers who grant severance pay think it helps maintain consistency and equal treatment of employees and promotes good public relations both internally and externally.
Before establishing a severance policy, the following questions should be considered:
Who is eligible for severance pay?
Are there any exceptions to eligibility?
How much severance will be paid?
Will severance be tied to length of service? If so, in what way?
Will severance be tied to classification of employee, e.g. hourly, salary, administrative, or executive? If so, in what way?
What procedures will there be for collecting severance?
What, if anything, will disqualify and employee from receiving severance pay?
What happens if the company is sold to a third party and the employee is brought into the new company?
How will severance be paid? If periodic payments are made, how often?
If periodic payments are made, what happens if the employee obtains other employment during the severance period?
Is severance guaranteed, or is it at the company's discretion?
If severance is discretionary, will the employee be required to sign a release?
If the employee is required to sign a release, what will the release contain?
It is important to know that employees receiving severance pay are not disqualified from collecting unemployment benefits. On the other hand, employees receiving wages in lieu of notice are disqualified for the term of the notice period. Wages in lieu of notice may not reduce the amount of unemployment benefits available to former employees, but the payment will delay benefits. Employees will not be able to receive unemployment benefits until after the pre-paid notice period has ended.
One further note: under the federal law known as ERISA, a policy or practice of paying severance pay or wages in lieu of notice can bring an employer under the requirement of treating the policy or practice as a "welfare benefit" under ERISA and reporting it on the IRS report form for ERISA, Form 5500. ERISA is a very complicated law, and employers that make such post-termination payments should consult a qualified ERISA attorney for guidance.