The United States of America is one of the few wealthy countries that do not require an employer to offer and pay a departing employee some sort of a severance payment. Were there such a federal requirement, it would most likely be couched in the Fair Labor Standards Act (FLSA) which governs wage and hour issues in all workplaces engaged in interstate commerce. But the FLSA includes no rules that entitle an employee to severance pay.
Instead, severance pay is a contractual arrangement. Thus, as long as no discrimination is made based on prohibited grounds, who gets severance pay and how it is paid is generally at the discretion of the parties.
When a company has a formal severance pay policy, it will include the purpose of the severance plan and conditions for paying severance. Eligibility for and the amount of pay and/or benefits will be included therein and is primarily calculated by the length of employment or service tenure. Other factors are frequently considered such as:
Reason for termination of employment (often termination for cause such as poor performance or misconduct will disentitle an employee from severance pay),
Re-employment of the employee by the same employer or its affiliates (this frequently triggers a claw back or termination of severance benefits), among other factors
Class of workers, for example, salaried workers may receive severance pay, but hourly employees may not. Executives are almost always offered some form of severance pay.
Company succession: severance agreement may stipulate that in the event the company is sold, acquired, mergers, etc. severance will not be paid unless an employee is involuntarily terminated.
Severance pay can be paid in a lump sum, or via regular pay periods for a specified duration, this is known as salary continuation. Depending on the circumstances, one or the other payment method might be preferred, for instance, if the separation arose from hostile circumstances it would be ideal to offer a lump sum and part ways with the departing employee immediately or if there are concerns about funding a large severance payment then salary continuation would be ideal. The payment method may affect the employee’s unemployment benefits and have tax liability consequences, so this is an important consideration for both parties.
An employment attorney can assist an employee in negotiating a severance package, especially if termination of employment was involuntary due to a group reduction in force. Even if the employee was wrongfully terminated, an attorney can advise on potential grounds for a wrongful termination lawsuit before the right to sue is waived or released in a severance agreement.
Due to the consequences of accepting a severance agreement and the potential benefits of having entered into a severance agreement, it is advisable to have an experienced employment attorney review the policy prior to executing any documents.