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Severance Pay Practices Vary Widely

Published by on May 19, 2008

A survey conducted by the Society for Human Resouce Management (SHRM), reported in the most recent issue of HR Magazine, shows that severance pay practices vary widely among employers.  The survey showed that 22 percent of those reporting did not make severance payments at all to non-union workers.  Of those that do make severance payments, […]

A survey conducted by the Society for Human Resouce Management (SHRM), reported in the most recent issue of HR Magazine, shows that severance pay practices vary widely among employers. 

The survey showed that 22 percent of those reporting did not make severance payments at all to non-union workers.  Of those that do make severance payments, 47% determined benefits based on length of service, 43% determined benefits based on position and length of service, and 8% based benefits on position.  The method of payment also varied widely — 37% made payments as salary continuation and 33% made lump sum payments.  Perhaps the most common ground was that more than 75% of respondents required laid-off employees to sign release agreements.

This survey prompts several comments:

—The vast majority of survey respondents require an employee to sign a release prior to receiving benefits.  This is a good practice.  If you give severance benefits, be sure to require the employee to sign a release of all claims against the company. 

—For workers over 40, a release agreement must comply with the Older Workers’ Benefit Protection Act in order to be effective.  This includes a requirement that the worker receive more consideration than they otherwise would have been entitled to in order for the release to be effective.

—If you have a severance pay policy or plan, have employment or ERISA counsel review the policy/plan documents.  If you are going to require the execution of a release agreement before you give out severance benefits, that should be spelled out in the policy.

—Severance pay may constitute “wages” under state wage and hour law.  If it does fall within the definition of wages, the failure to pay severance may give rise to penalties, liquidated damages and attorneys’ fees for claimants who have to pursue the unpaid severance benefits in court.

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