With the unpredictable stock market, the job front doesn't look like it's headed in the right direction any time soon. Employers are still hesitant to hire, and in many cases, workforce reductions are continuing. Despite the economic troubles companies are facing, most employers are not cutting back on severance packages or unemployment benefits.
In fact, according to a recent survey by WorldatWork, most employers still provide one or two weeks' severance pay for each year of service, and virtually half of employers offer outplacement benefits to all terminated employees while 36 percent of employers provide it on an individual basis, an increase from 27 percent in 2009.
The lack of severance package drop off, even when companies are looking to cut costs in all possible areas, is likely because offering a severance package is a sign of good will, says Dave Smith, a staff attorney for the Mountain States Employers Council, an employers' association that helps members with HR and employment law issues. By offering a severance package, employers are typically hopeful that former employees will have some extra financial security during their unwarranted departures, and any legal ramifications will be avoided.
Recommended For You
"The fact that a person is getting some additional compensation beyond their last day of work shows that the company is dealing with that individual fairly," Smith says. "And if the individual or individuals perceive that the company is responding fairly, they're less apt to go pursue some legal remedies."
Preparing, executing a severance package
Before an HR manager even begins to start the layoff process, plan documents must be prepared, Smith says. The Employee Retirement Income Security Act, which is mandated by federal law, requires that employers have plan documents ready because it protects the rights of workers by defining the eligibility factors, the amount of severance and the criteria of severance.
Having these plan documents ready is also important for tax implications, Smith says. A tax accountant or attorney should review all of the documents to make sure everything is in in compliance with the ERISA laws.
When an employer offers a terminated employee a severance package, it can include supplementary compensation beyond the severance amount, which is known as additional consideration, in exchange for a waiver that releases all legal contesting rights signed by the employee. For this waiver to stick, Smith says, the employee cannot sign the contract under duress, meaning it must be signed under the employee's free will.
"A person can't claim duress in a situation where they had to sign the waiver because they needed the money," Smith says. "It has to be some type of legal definition of duress, which would be one person forcing another to sign that claim."
Of course, state laws differ throughout the country, which means it's important for HR departments to examine their own specific regulations regarding severance plans and unemployment benefits. In Arizona and Colorado, for example, an employer is not required to deliver a written notification to terminated employees, Smith says; however, this could be different in other states.
Often, terminated employees may ask how their severance will pay out and affect their unemployment compensation eligibility, but this also varies by state. Severance is considered additional pay past the employee's last day of work, and this delays unemployment compensation eligibility in some states. For someone who is no longer on a payroll, this can be a huge issue.
"The HR department needs to be aware of the specific unemployment compensation laws for the state in which the employee has been employed," Smith says. "It's not necessarily the case in every state, so an HR department needs to know how the amount of severance will affect a person's eligibility for unemployment compensation. I think that's the biggest issue in terms of severance and unemployment compensation."
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
