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Severance Packages: 3 Things Your Employer Doesn’t Want to Admit

Like most Pennsylvanians, when starting a new job, you will have to fill out several forms and potentially even sign an employment agreement.  For those who are unfamiliar with these types of agreements, they can often be confusing.

But in order to accept the position, more often than not you will have to sign the employment agreement.  Although signing an agreement without entirely understanding the terms and conditions may sound frightening, don’t worry.

On our law blog we have outlined some of the most common parts of these agreements so that you can understand exactly what you are agreeing to before signing.

Although employment agreements may seem like they only benefit the employer, there are portions of the agreement that are beneficial for the employee as well.  One of these sections is the severance package.

What is Severance Pay?

The term ‘severance pay’ refers to one or more payments an employer makes to you when you separate from your position.  Severance packages are most commonly found in employment contracts as conditions of termination.

Severance packages in an employment agreement may also cover employee resignations when such resignations are for “good reason.”  This covers situations where the employer makes unfavorable changes to the employee’s working conditions, such as a reduction in pay, loss of responsibilities, or a downgrade in title.

Types of Severance Pay

There are five primary forms of severance pay:

  1. None at all;
  2. Unemployment compensation;
  3. Severance pay plans;
  4. Voluntary severance pay; and
  5. Bargained for severance by agreement.
When Won’t I Receive Severance Pay?

If you are an at-will employee, it is unlikely that you will receive a severance package when you are terminated.  This is because at-will employees do not have a right to receive severance pay.

An at-will employment relationship is one where the employee can be terminated by the employer for any reason, at any point in time. In an at-will employment relationship, the employee is also able to end the relationship at any time for any reason at all.  Most employment relationships where there is no employment contract are presumed to be at-will relationships.

Because many at-will employment relationships do not have an employment contract, unless severance has been separately bargained for, these employees are not entitled to severance pay.

Further, even if you have an employment contract, if the contract itself does not spell out that you are entitled to receive severance pay upon termination, you are not entitled to severance.  This is because there is no existing law that requires severance packages.

Unemployment Compensation

Unemployment compensation benefits can also be considered a form of severance pay.  These benefits pay workers who lost their job without fault a weekly payment.  This payment lasts either until the worker finds a new job or up to a specified number of weeks.

Unemployment compensation can vary from state to state, but the general rule is that employees who were not fired for cause can claim unemployment benefits.  To do so, you must file with the state (or states) where you were employed.

Severance Pay Plans

A severance pay agreement is a contract between a departing employee and his or her employer.  The terms of this contract are typically based on the length of employment.  The majority of employers have policies in their employee handbook that outline how the employer handles severance pay.

Typically, the packages offered by employers are a lump sum and are taxable.  They generally include an employee’s regular pay, potentially along with:

  • Extra pay based on length of employment;
  • Compensation for accrued sick days, vacation time, and/or holiday pay;
  • Medical benefits, dental benefits, and life insurance; and/or
  • Retirement accounts and stock options.

Although there is no law that specifically requires employers to provide severance pay, if an employee’s contract or the employee handbook specifies that they are to receive severance pay upon dismissal, the employer is legally obligated to pay the employee severance pay upon the termination of the employment relationship.

Voluntary Severance Pay

A voluntary severance pay program is a financial package that is offered to employees in hopes that they will resign or retire. A voluntary severance package allows employees to accept or decline the offer.

Typically, an employer will offer a voluntary severance package at a time where the company can benefit from paying fewer salaries and offering less benefits.  Employees who are high-earning and have been with the company for a while who are also close to retirement age may be offered early retirement packages.

An example of how a voluntary severance plan operates is outlined below:

  1. The employer offers a group of eligible employees to “request inclusion” in a severance program that promises specific benefits in exchange for a release of claims.
  2. These employees have a specific window during which they can accept the package and voluntarily terminate their employment with the employer.
  3. Based on its workforce needs, the employer chooses to accept or reject requests, and implements the terminations of those whose requests are accepted.
  4. If the voluntary severance plan does not accomplish its objectives, the employer will then implement an involuntary reduction in force. Such a reduction in force is typically disclosed when the voluntary severance package is initially offered.

A voluntary severance package is sometimes referred to as “a golden handshake” in the business world, because it provides benefits for both the terminated employee and the employer.

Bargained for Severance by Agreement

At the beginning of their employment, highly sought-after employees may be able to bargain for severance pay.  If the employee has sufficient leverage, he or she may negotiate severance pay following a change in control or other involuntary termination where the employee is not at fault.

The employee may also potentially bargain for severance when an employee resigns for “good reason.”  This may include situations where the employer makes unfavorable changes to the employee’s working conditions, such as a reduction in pay, loss of responsibilities, or a downgrade in title.

Although there are no laws that require severance pay, if an employer fails to pay severance as promised in an employment agreement, the employee is able to sue for breach of contract.

Further, employees may also be able to bargain with employers over severance pay at the end of their employment.  This most often occurs when the employer wants a clean break and requires the employee to agree not to sue upon termination.

What is the Benefit to the Employer?

As mentioned earlier, there is no requirement in the Fair Labor Standards Act (FLSA) mandating severance pay.  Thus, many people may wonder why an employer would want to agree to a severance package when on its face, such an agreement does not seem to benefit the employer.

Because a severance package is part of an agreement between the employer and the employee, the employer also gets something out of the deal.  Typically, this includes a release of claims.

This means that when the employee is terminated, he or she will not be able to sue his or her former employer for wrongful termination, among other claims, typically workplace discrimination claims.

As a result, employers are often as eager as employees to enter into an agreement for severance pay.

In exchange for offering a severance package in an employment agreement, an employer may also require an employee to sign a non-competition agreement.  A non-competition agreement is an agreement entered into between employer and employee where the employee agrees not to compete directly with his or her employer following the termination of their working relationship.

This often requires the employee to not seek employment in the same field as their former employer including working for a competitor or starting his or her own business in the same area.   For a further explanation of non-competition agreements, see our blog on non-competes in Pennsylvania.

Should I Sign an Employment Agreement with a Severance Package Included?

If you are just starting a new job and you are unsure whether to sign an employment agreement that includes a severance package, don’t worry.  J.P. Ward & Associates is here to provide assistance by going through the agreement step-by-step with you to determine what is in your best interest.  Contact us today by filling out this contact form or by calling 877-259-WARD.

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