Severance Pay
Severance pay comes in five forms:
- None at all
- Unemployment compensation
- Severance Pay Plans
- Voluntary Severance Pay (rare today) and
- Bargained for Severance by Agreement.
At-will employees rarely receive severance pay upon their termination. They usually have no right to receive it. Unless fired for cause, though, eligible, terminated at-will employees should receive unemployment compensation benefits.
Employers can offer a Severance Pay Plan as an employee benefit, but most do not. Employers can voluntarily pay severance to employees, and some used to do it. If the employer demands a general release of rights (i.e., a promise not to sue) in exchange for severance, that converts an offer of severance into a negotiated severance payment by agreement. Severance pay agreements also include severance pay clauses in employment agreements negotiated at the beginning of employment.
Employers have No Obligation to pay Severance to At-will Employees
Unless the parties agree otherwise, the law presumes that their employment relationship is “at-will.” This means it lasts only as long as both parties want it to last. Either of them can end it at any time, for any lawful reason, or even for no reason at all. This tends to work out well mostly for employers.
Once either party ends the employment relationship and the employer pays the employee amounts earned, the employer’s obligation to pay an at-will employee ends . After that, employers have no further obligation to pay anything to at-will employees, including severance pay.
Unemployment Compensation Benefits
Unemployment compensation benefits pay workers who lost their job without fault a modest weekly payment until the worker finds a new job, up to a specified number of weeks. Each state administers its own unemployment compensation program.
Unemployment compensation benefits, which are also known as unemployment insurance, are not, technically, a form of severance pay. Rather, the federal government created unemployment compensation programs as a statutory benefit in 1935. Taxes on employers fund unemployment compensation benefits and each state administers. its own program.
For at-will employees, unemployment compensation benefits fill a function similar to severance pay, providing cash when needed most. MEL has more information on unemployment compensation benefits here.
Severance Pay Plans
Employers can offer employees severance pay benefits in the event of certain job losses, like from a reduction in force. Severance plans typically compute benefits using a formula based on length of service, like a week or month of pay per year of service.
Once an employer offers a severance pay benefit, federal law treats it as a “welfare benefit plan” under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is the same law that covers employer group health insurance plans. ERISA requires employer who offer ERISA plans to put them in writing and to provide written summaries to covered employees. Importantly, if employers do not deliver a promised ERISA benefit, or interfere with employees' right to it, ERISA gives employees the right to go to court. Employees who win ERISA cases can also receive an award to pay for their attorneys’ fees.
For employees covered by a severance pay plan, ERISA means that they will know what severance they should receive and under what circumstances. Union employees covered by a collective bargaining agreement (CBA) could receive severance pay if it is a negotiated benefit in the CBA. A severance benefit in a union contract looks like an ERISA severance pay plan, but is regulated by federal labor laws.
While employers can create severance pay plans, most do not. Employers who create severance pay plans can and do specify the terms, choose who participates and decide what to pay and when. Employers can modify or terminate severance pay plans whenever they want, and owe only the severance resulting from a triggering that already occurred.
Voluntary Severance Pay
At one time some employers paid departing executives severance pay without any obligation to do so, and sometimes without requiring a release of rights in return. From the point of view of an owner or stockholder, voluntary severance pay to a departing executive is problematic. The company can hardly expect to get much of a return from an employee it just terminated. From a rational economic perspective, though, these companies arguably earn a reputation for fair play among the small universe of potential employees for top positions. This helps them secure leadership for jobs that are by nature risky and insecure.
Like coaches of major league teams, though, most executives now negotiate severance terms as part of their initial employment agreements. If they did not do so, their employer may still agree to pay them severance at the time of their termination, but in exchange for an agreement not to sue and a general release of rights. Both types of agreements are examples of bargained for severance agreements.
Bargained for Severance by Agreement
Employees can bargain with employers for severance pay at the beginning of their employment. Like any other bargain, a sought after employee with adequate leverage can negotiate severance pay following a change in control or other involuntary termination without “cause.” Cause usually means the employee is at fault or did something to contribute to the termination decision . Severance pay provisions in employment agreements may also cover employee resignations for “good reason.” "Good reason” looks at changes made by the employer to the employee’s working conditions, like a reduction in pay, loss of responsibilities or a downgrade in title. If an employer fails to pay severance promised in an employment agreement, the employee can pursue a breach of contract claim.
Employees can also bargain with employers over severance pay at the end of their employment relationship. The employer may want a clean break and a promise by the employee not to suet. In that event, severance pay negotiations resemble any other bargain for the purchase and sale of property, where the property is the employee’s right to sue the employer.
The trick in such bargains is to figure out the value of the employee’s right to sue the employer. In general, an employee’s right to sue is what the employee would receive if he or she won in court, discounted by the probability that the employee will not win, and less the cost required to take a case through court. As discussed in greater detail here, if the employer and employee agree on the value of the employee’s claims, they can agree at the time of separation to pay the employee for those claims and both parties the risks, costs and distractions of a lawsuit.
Lawyer Matches (59)
Wibbels, Joseph
Fighting for Employee Rights
Louisville, Kentucky
Lewis, Drew
We Fight For Employees, And We Win
Roseville, California
Fry, Katherine
Delaware lawyer, 26 years' experience, employment advice and litigation for entities and executives
Wilmington, Delaware
Hayber, Richard
Hartford Connecticut Employee Rights Attorney
Hartford, Connecticut
Rukin, Peter
A Creative Approach to Resolving Workplace Claims.
SAN FRANCISCO, California
Hatzidakis, Christina
Providing employment advice and litigation
Chicago, Illinois
DeBrota, Amy
Experienced Employment Lawyer and Mediator
Carmel, Indiana
Fidlon, Gregory
Experienced and Effective Georgia Employment Law Specialist
Atlanta, Georgia
LaSorsa, Peter
No Fee Unless You Recover
Chicago, Illinois
Burgis, Michael
Workers Compensation Law Firm
Sherman Oaks, California
Pietrucha, Cynthia
Employment Severance Lawyer
Naperville, Illinois
Carnes, William
Experienced Employment Law Counsel
Tampa, Florida
Anderson, Kyle
Mansell Law
Columbus, Ohio
Ballman, Donna
Ft. Lauderdale, Florida
Dabrowski, Doris
Legal analysis, advice and advocacy to help you achieve goals
Philadelphia, Pennsylvania
Blanchard, David
Fight abusive non-compete lawsuits, wrongful termination and all employment retaliation
Ann Arbor, Michigan
Kazazian, Nina
Denver, Colorado
Kazazian, Nina
Free 20-minute telephone consultation
Denver, Colorado
Pastor, Patricia
New York Employment Lawyer
Northport, New York
M. Stern, Keith
Skilled. Experienced. Trusted. Effective.
Miami, Florida
Yezbak, Charles
Nashville, Tennessee
Kingsley, Eric
Los Angeles Employment Law Attorney
Encino, California
Tsintolas, Suzanne
Experienced Employment Lawyer in DC & Maryland
Washington, District of Columbia
Herbert, Rhiannon
Mansell Law, LLC
Columbus, Ohio
Blumenthal, Norman B.
FREE CONSULTATION - CALIFORNIA LABOR LAWYERS - OBTAINED OVER $1.3 BILLION FOR EMPLOYEES & CONSUMERS
San Diego, California
Mansell, Greg
Employment Attorney Columbus Ohio Wrongful Termination
Columbus, Ohio
Jackson, Marcus
Plaintiff-side Employment Lawyer handling cases throughout Southern California.
Temecula, California
Guleser, Ann
dgt4tet
Sherman Oaks, California
Knecht, Todd
Grand Rapids Labor and Employment Lawyer
Grand Rapids, Michigan
Hardwick, Virginia
Employment Rights Advocate: Experience, Judgment, Commitment to Excellence
Doylestown, Pennsylvania
Hennessy, Brendan
Employment Attorney Philadelphia Malvern
Malvern, Pennsylvania
Miller, Judith
Newton, Massachusetts
McKinney, Thomas
Experienced NJ Employment Lawyers focusing on Discrimination, Harassment, Overtime & Severance
Morristown, New Jersey
Fett, James
Employment Attorney
Ann Arbor, Michigan
Barasch, Patricia
Employee Rights Advocates
Moorestown, New Jersey
Leeds, Jacques P.
Law firm in Houston, Texas
Houston, Texas
Tseng, Judy
Wage and Hour Act, sexual harassment, disparate treatment, wrongful termination, discrimination.
Cary, North Carolina
Glickman, Stephen
Aggressive, Responsive Chicago Employment Law Attorney with over 25 Years' Experience.
Chicago, Illinois
Rizzo, Albert
Experienced Employment Representation
New York, New York
Adams, Christine
Exclusively Practicing Employment Law in California, with Offices in Santa Barbara and San Diego
Santa Barbara, California
Attardo, Loretta
Salem, Massachusetts
Rose, Patty
COMPASSIONATE ADVICE AND COUNSEL ON EMPLOYMENT ISSUES
Seattle, Washington
Davis, Ryan
Top-Performing Lawyers Fighting for the Injured Workers of Sacramento
Sacramento, California
MIltenberger, Chris
Experienced & Aggressive = Efficient & Affordable Representation. Free Consultation
Southlake, Texas
Mertz, Andrea
Your vigorous advocate pursuing unscrupulous employers.
Wyomissing, Pennsylvania
Herman, Charles
Charles Herman Law - Employment Law Attorney
Savannah, Georgia
Weinberg, Jill J.
Overtime claims, severance, non-compete & employment contracts
Dallas, Texas
Royer, Christina
Experienced, Respected Employment Lawyer
Independence, Ohio
Sedey, Kate
Partner at The Case Law Firm, LLC, a Chicago-based civil rights employment law firm.
Chicago, Illinois
Wagner, Lindsey
Employment Attorney
Jupiter, Florida
Filippatos, Parisis
Fighting for Justice in the Workplace
Bronx, New York
Goldsmith, Leizer
Outstanding Sexual Harassment and Employment Lawyers
Washington, District of Columbia
Wells, Samuel J.
Los Angeles, California
Barna, Jim
A WEALTH OF EXPERIENCE FOR EMPLOYMENT LAW REPRESENTATION.
Syracuse, New York
Maduff, Aaron
A Nationally Recognized Employment Lawyer Licensed in More than 20 Jurisdictions
Chicago, Illinois
Gerber, Karl
Successfully Representing California Discrimination Victims Since 1993
Los Angeles, California
Perotti, Patrick J.
Aggressive. Creative. Successful.
Painesville, Ohio
Case, Kristin
Founding Member of The Case Law Firm, LLC., a Chicago-based civil rights employment law firm.
Chicago, Illinois
Dettling, Rosemary
The Federal Employee Legal Services Center represents federal employees in EEOC and MSPB cases.
Washington, District of Columbia