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Pros & Cons of Severance Packages for Employees

written by: Vikas Vij•edited by: Jean Scheid•updated: 12/4/2010

Severance packages for employees are like a double-edge sword that needs to be handled with caution. Instead of getting quickly lured by its short-term value, the employee must evaluate his options carefully before making a decision.

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    Severance Package for Employees: Pros and Cons

    Severance Package Severance packages for employees are usually a bag of mixed blessings from both the employer as well as the employee’s perspective. It is not mandatory under the Fair Labor Standards Act (FLSA) in the United States to provide a severance package to an employee at the time of termination of employment, except under certain specific circumstances. However, there can be a mutual agreement between the employee and management regarding an amicable parting of ways, and a severance package can be agreed upon by both sides.

    Pros of Severance Packages

    As far as the employer is concerned, a severance package for employees is a fair and just solution to reduce the employee cost burden on the company. In times, when the general economy is under pressure and the demand for the company’s products or services has declined, the company may be forced to cut down its human resource costs in order to survive the difficult economic phase. Instead of bearing the recurring costs of a surplus workforce with low productivity, the company may decide to pay a one-time severance package.

    If the company has a policy or a tradition to give severance packages to employees under specific situations, it can enhance the company's image as a fair employer. A severance package is a way of telling the employees that the company cares for its people. There must be a bond of mutual respect and concern even when the employer and employee have to part ways due to unavoidable circumstances. Such gestures have an underlying positive impact on issues such as employee loyalty and employee motivation levels, which are crucial to the company's long-term productivity.

    Cons of Severance Packages

    It is not always true that severance packages for employees are the ideal option for a company which is passing through a financial crisis. The crisis may be temporary and the offer of a severance package may result in the company losing some of its best employees. Therefore, a careful assessment of the situation is necessary before resorting to such measures.

    Secondly, the financial cost of the severance package may be quite high, and the company’s liquidity position may not be comfortable enough to allow such a smooth and amicable exit for the employees. The challenge can be greater if the number of employees to be laid-off is substantial. A severance package is usually a one-time payoff, and the company needs to have that much spare cash on hand to afford such a deal. So the short-term economic burden of severance packages can be a major challenge for the business, particularly in times of financial difficulty.

    In the final analysis, it is important for employers to understand that a severance package is a double-edged sword that must be evaluated carefully and used with judiciousness and caution in exceptional circumstances.

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