Why award severance pay?
Traditionally, severance pay has been awarded by companies to provide a financial cushion to employees facing the loss of their jobs, to help tide them over during unemployment, and to compensate them to some extent for the loss of seniority and other rights and privileges accruing to them by reason of their length of employment. While it was generally true that severance plans were limited to instances where the employee's work relationship was completely severed, that practice is expanding to include employees who do not relocate or who are terminated for job performance.
Also known as termination pay, salary continuance, dismissal allowance, separation benefits or layoff allowance (if layoff is permanent), plans covering severance pay usually provide a cash payment in a lump sum or in installments to employees whose employment has been terminated. Non-cash benefits such as outplacement, extended benefits coverage, and use of company facilities may also be included.
Is severance pay taxable income? Severance pay is includable in an employee's gross income and is taxed accordingly. Other non-cash severance benefits, such as outplacement, are not generally taxable to the employee.
Is severance pay subject to ERISA? Severance pay plans are generally considered employee welfare benefit plans under the Employee Retirement Income Security Act (ERISA). However, they are not subject to the participation, vesting, and funding requirements ERISA imposes on pension plans.
Does a severance plan have to be in writing? Yes. ERISA regulations require that severance plans be in writing, and it is good practice to put severance plans in writing to avoid the potential of litigation that may have been avoided if the plan provisions were clearly documented and communicated.
Is there a law that requires a company to provide severance pay? There is no federal requirement for employers to provide severance pay directly to employees. Unemployment compensation is a federal- and state-mandated program that provides income to separated employees under certain circumstances. State-mandated severance benefits may be available when provided for by statute and vary from state to state.
Competitive pressure, recruiting, and corporate image concerns have induced many employers to provide severance programs, as well as a desire to limit potential litigation resulting from terminations.
Must severance plans apply to everyone, or can plans be limited? Plans can be limited to specific types of terminations, classes of employees, a qualifying event and for a specific time period. The ability to receive some severance benefits can also be conditioned upon signing a waiver or a noncompete agreement.
However, severance plans cannot discriminate among eligible participants or be designed to discriminate against certain protected categories such as individuals of a certain age, sex, racial or ethic origin.
What does a "typical" severance package consist of? One week of pay per year of service is often provided, with a minimum severance is 8 weeks for executives, 4.5 weeks for exempts, and 4 weeks for nonexempts, regardless of seniority. Frequently maximums are imposed as well. Severance payments are made either by salary continuance (regular pay processing) or lump sum. Payments typically will not cease if the employee finds work during the severance period.
The company will request a signed release in return for payment. Extensions are not granted and there is no formal appeal process.
Outplacement is provided to executives, although some kind of career transition assistance may be provided to both exempts and nonexempts on a case-by-case basis.
Reprinted with permission. © CCH
Why award severance pay? Traditionally, severance pay has been awarded by companies to provide a financial cushion to employees facing the loss of their jobs, to help tide them over during unemployment, and to compensate them to some extent for the loss of seniority and other rights and privileges...