Basic Facts About Employee Severance Packages
The sample of employee severance package featured in this article provides information on how much is usually offered for each type of benefit and the treatment of term benefits or annuities in cases where they are included.
At this point, readers are reminded that any benefits paid as part of a severance pay package are at the discretion of the employer and may be subject to eligibility requirements and certain specific factors like, but not limited to:
Minimum length of time for rendered services;
The reason for the employee’s separation, whether for good cause, downsizing, voluntary resignation, or retirement; and
The overall financial condition of the company and its capacity to pay, particularly if the employee’s involuntary termination is an offshoot of the company’s bankruptcy.
Also, the benefits will be awarded only if the employee formally accepts them through a written severance agreement. This document will also serve as the employee’s instrument in claiming or enforcing the payment of said benefits.
Examples of EEOC Provisions in the Payment of a Severance Package Plan
Although there are no federal laws that require employers to pay their departing employees any form of severance package, there are certain provisions of the US Equal Employment Opportunity Commission (EEOC) to which employers should pay heed in the event that a severance package will be paid.
The following are examples of applicable provisions contained in the EEOC Compliance Manual of Policies pertaining to manners of paying separation benefits to employees who were involuntarily terminated :
Employers must provide equal severance benefits and opportunities to all departing employees regardless of age or eligibility for pension benefits.
Violations of this provision particularly refer to exclusions of senior employees eligible for retirement in the near future but who lost their jobs just as the younger members of the workforce did.
Retiring employees who were laid off from work prior to their actual retirement should not be excluded from offers of recall or re-employment.
The severance pay offer is different from the pension pay that the involuntarily retired employee is bound to receive in the course of his retirement. Severance pay and pension benefits should in no way be made to offset against each other, unless the item for offset qualifies under the EEOC’s exception rules.
Offsets against severance pay are allowed, only if granted in the form of health care benefits or additional pension pay, for employees near their retirement age. This is further subject to the provision that the health care benefits offered are at the least comparable to Medicare benefits in terms of type and value.
It is also important that the employee to whom the offset was offered has accepted said offer in writing.
The value of the offset against the senior employee’s severance pay shall be in accordance with the values prescribed by the EEOC under Sec. 40. Please click on the image to get a larger view of this provision.
Offsets of long-term disability benefits against pension benefits are allowed only if the employee’s separation is not connected to involuntary terminations or where the employee was not forced to retire in connection with manpower downsizing.
Readers can find more information about the offsetting of benefits, particularly to older employees who are about to retire, by visiting the EEOC’s webpage for EEOC for Compliance Manual Chapter 3 Employee Benefits.
A Sample of Employee Severance Package
There are no rules that specify how much severance pay employers should give to their employees because this benefit is given as a token of appreciation or recognition of workers’ loyalty and contributions to the company. Hence, this portion of the separation package is often based on and/or awarded according to number of years of service.
Usually, a minimum length of service is required as eligibility to receive severance pay. The average length of time most employers require is at least one to two years.
The amount of severance pay granted is typically equivalent to one to two weeks’ pay for every year of service rendered.
Please continue to Page 2 for more Sample Severance Package Information.
Sample of Employee Severance Package (continuation)
Unused Leave Credits
Basically, there are no federal requirements for the payment of sick leave and vacation leave credits; hence the employer has the option whether or not to include unused sick leave credits as severance pay. Still, the payment of those credits will depend on the company’s policies.
The Family and Medical Leave Act ‘s (FMLA) rules pertain to mandatory paid sick leave credits if the employee’s reasons fall under any of the conditions specified in the FMLA. These rules refer to usage and their mandatory nature as paid sick leave.
Generally, vacation leaves require one year of service for eligibility and are usually equivalent to 40 hours or one week of paid time away from work.
However, some employers discourage the accumulation of sickness and vacation leaves and instead require their employees to exhaust these leaves yearly; otherwise, a one-week paid vacation benefit will be forfeited. Some companies maintain that the benefits of these leaves should be properly utilized as a way of keeping their human resources fit and healthy. This way, problems about long-term disability could be minimized if not eliminated. This, of course, should be so stated in the company’s policies in order to be enforceable
Companies that require the exhaustion of sick and vacation leave will pay only the current year’s unused sick and vacation leave credits, in full or prorated, if the resignation, retirement, or separation takes place before the year ends.
Some employers, however, prefer that employees report for work continuously to avoid absenteeism and the hassles of filling vacancies, albeit temporarily. As incentive, unused sick and vacation leaves can be accumulated up to a maximum amount and are commutable to cash upon separation from the company.
Health and Accident Benefits
In most cases, the separation package includes a continuation of health and accident benefits for older employees who are near retirement age or for those who have family members in need of health care benefits.
For involuntary retirement or mass layoffs, it is proper to offer this in accordance with the rules provided by the EEOC, where separation benefits are extended equally regardless of age, while requiring eligibility in terms of years of services rendered. This benefit may be offered as an offset against the severance pay in amounts prescribed by the EEOC as mentioned in an earlier section.
Negotiations may include an offer of premium payment for short-term health care and accident insurance coverage, in which the costs of such short-term coverage may be negotiated as an additional severance benefit or used as a valuation adjustment against the severance pay. This might be regardless of COBRA eligibility.
Group Life Insurance
The offer to continue group life insurance for lifetime coverage may be included as part of the separation package, but on a case-by-case basis. This is usually offered to employees who are near retirement age. In order to offset the costs of said lifetime coverage against the severance pay, it is important that the employee is already a recipient of said insurance benefit and has accepted the offer. Otherwise, the employer has no basis for the valuation of adjustments to the severance pay.
Additional Pension Credits
This benefit is usually offered to employees who have had 20 years of continuous employment and are being forced to retire before the age of 65 as a way of downsizing the workforce. Benefits to be paid will be in accordance with the company’s pension payment scheme per age brackets.
The pension may be included as part of a severance package by increasing the monthly pension pay based on the full retirement bracket–let’s say $1,000 per month instead of the actual amount due the retiring employee, $900 per month for purposes of this example. If the retiring employee who will receive an additional pension credit of $100 per month is 60 years old, the amount may be used as valuation adjustment against the severance pay.
Thus, the valuation adjustment will be computed by multiplying the 5-year retirement date difference by 12 months times the $100 additional credit, which is equivalent to $6,000. This amount will be used to reduce the severance pay that forms part of the package.
To complete our example, if the severance pay benefit of the employee is $40,000, the retiring employee will receive his package in a lump sum amount of $34,000, and the $6,000 will be imputed in his increased monthly pension pay.
Please continue to Page 3 for more Sample Severance Package Information.
Sample of Employee Severance Package (continuation)
Supplemental Unemployment Benefits
This benefit automatically forms part of the employee severance package if the reason for separation is not of the employee’s own doing or in a case of involuntary termination. For a complete discussion of this benefit, readers may refer to a separate article entitled Explaining Supplemental Unemployment Benefits to Employees.
This severance benefit usually requires an employment contract. Stock option benefits are used as part of a bargaining leverage in acquiring the services of an employee to occupy top-level managerial positions or even higher. His or her services are expected to contribute largely to the growth of the company; hence the offer of stock option benefits upon his separation or retirement from the company is a form of incentive bonus. Provided, however, that the employee has not been terminated for good cause, the employee can exercise his option to buy or sell his assigned stocks at the most opportune time, upon his separation or retirement.
These are offers for job placement services either by way of offering training programs to enhance the terminated employee’s qualifications or to provide skills the employee could use to start a business. Some employers include offers of computer laptops in order to provide the employee the adequate tools needed in job hunting.
In offering this benefit, the employer aims to broaden the employee’s access to job employment opportunities at fewer costs often related to job search activities. In some cases, these offers may come with an option for cash conversion, which makes this severance benefit taxable.
The aforementioned are only examples of benefits included in severance pay packages; but if there is a union contract, a signed employment contract, or a company policy that contains provisions and details for payment of a severance package, then the employer is bound to pay whatever benefits are stipulated as employee separation benefits.
It is important to have proper legal advice in formulating the components of a severance package, particularly in the matter of drawing up legal documents such as severance agreements and waiver of rights or quit-claims. The contents of this article are intended only as an informational tool and should not be misconstrued as proper legal advice.
For more of the tax information pertaining to the benefits mentioned in this sample employee severance package, readers may refer to a separate article entitled Tax Treatment of Severance Pay Benefits.
Reference Materials and Image Credit Section:
- All Business.com Step No. 3: Form of the plan–By Zalik, Stephen June 1 1994 Publication: Supervision Four steps to establishing a sound severance pay plan – https://www.allbusiness.com/human-resources/440510-1.html
- US -EEOC Compliance Manual –https://www.eeoc.gov/policy/docs/benefits.html#1. Introduction (Sev)