Everything You Need to Know about Severance Packages
Losing one’s job is probably one of the events most dreaded by everyone in any workplace. It means a loss of income and to many people, this also means the loss of their main source of livelihood.
However, there are simply instances where businesses are forced to “downgrade” their operations, either by closing subsidiaries or divisions or stopping certain operations. Sometimes, this means that some departments have to be removed, and the people working on them have to be laid off.
But all is not lost, especially when the company you work for has a labor union that acts on behalf of the workers or employees. One of the main points that labor unions pay attention to when entering negotiations with management is the matter on severance packages, or what will be given to employees in the event that they are forcibly removed from their jobs or laid off.
This guide will shed some light on 1) what is a severance package, 2) what to look for when reviewing severance packages, 3) tips for negotiating better severance packages.
WHAT IS A SEVERANCE PACKAGE?
A severance package, also known as “separation” package, is the amount of money and/or other benefits that will be given to an employee or worker who will sever its ties with the company he or she works for. The purpose of this package is to compensate for, or offset, the loss of income, at least temporarily.
Giving severance packages is not a legal requirement for employers. There is no provision in the labor laws stating that companies should have severance packages before they are allowed to operate.
However, it becomes a legal requirement when there is a labor union formed within the company, and the union successfully negotiates terms for severance packages for its members – who are employees of the company – in the event that they have to be separated from the company.
These terms will be detailed in a union contract, which makes it legally binding between the employer and the employees.
In other instances, although there is no labor union, and there is no union contract to speak of, some employers may feel compelled, out of sympathy, gratitude or respect for employees, to offer severance packages.
What’s Included in Severance Packages
There are many people who think that an employee’s last paycheck is his severance pay. This is not correct.
As the phrase implies, the last paycheck covers the employee’s salary or wage for the time worked leading up to the effective date of termination of his services. He was able to render the service and is being paid for it. The severance pay, on the other hand, is for the period after the termination date, when the employee has received his last paycheck.
So what is the coverage of severance packages?
We mentioned earlier that severance packages are any “amount of money and/or other benefits”, which implies that these packages may include financial and non-financial payments.
Obviously, most employees that are about to be separated from their jobs in a company would want to be paid in form of money. There is the severance pay, which may be based on the number of years of service. It may also include any bonus, commission or other deferred compensation (including business expenses that have not yet been reimbursed to the employee) that are due to the employee from the employer.
If the employee also has rights under a profit-sharing and a 401(k) plan with the company, these will also be included in the money component of the package.
If the company has provided stock ownership rights to its employees, the employee will also be given the option to exercise these rights and liquidate them, so they are also included in the financial component.
In some cases, companies may pay part of severance packages in non-cash or non-monetary forms. When the money paid is deemed to be insufficient, employers may opt to add non-financial benefits or perks on top of severance money. Examples include placement services for future employment, free job trainings and workshops.
Payment Terms of Severance Packages
How much must be paid?
How much money should an employee receive as severance money? There is no fixed or standard amount on how much employers are supposed to pay. Be reminded that severance packages are not required by law, to begin with, so there is no pronouncement regarding to its amount.
The amount of severance money, then, will depend on how much was negotiated between the labor union and the management, and was put down in the union contract. Usually, the computation makes use of the number of years that the employee has been in service in the company, and increased by several weeks of pay (depending on the management’s discretion) for every year of service rendered.
How will it be paid?
Just like the amount of severance money and the other inclusions in the package are not fixed by law but are actually subject to what is indicated in the contract, the mode of payment of these packages are also not fixed or set in stone. Mainly, it depends on the employer.
Why is this the case?
Remember that the main reason why most employers have to lay off people is because they are lacking in resources and have to do some cost-cutting. Thus, it is possible that the business may not be liquid enough to pay severance packages in a single lump sum payment. As a result, the employer may opt to make its payment on an installment basis, over a certain period of time.
How are the terms established?
Usually, it is the executives or top management of the company, in coordination with in-house human resource managers or even external HR professionals, who will come up with a formula on how much is considered to be fair and equitable. If there was a contract agreed upon before, this will also be used as a
WHAT TO LOOK FOR WHEN REVIEWING SEVERANCE AGREEMENTS
Once you enter a company as a new employee, or become a member of a labor union within the company, you should take the time to go over the benefits and entitlements that you will get as a member of the union. One of them is the severance package that you will be entitled to should you find yourself losing your job in the future.
The severance agreement contains the severance pay (financial) and non-financial benefits that the employers offer beyond a displaced or terminated employee’s last payment. This agreement is handed to the employee often upon informing him of the decision that his employment will be terminated.
For sure, the employee will be assailed with various emotions, and a lot of questions will be running through his mind at the sudden turn of events. Unfortunately, it is the prerogative of employers whether they will keep on an employee or let him go. The next thing that the employee should do is to be objective about things and take a look at the severance agreement.
A typical severance agreement will detail the following:
- The specific amount of severance pay offered to the employee
- Benefits that will also form part of the package
- How the severance pay was calculated or arrived at
- Methodology of payment of the severance pay
- Return of property, or clearance from property and accountabilities
- Non-compete and confidentiality agreement
- A covenant not to sue
These are not the only things that you should look for in the severance agreement. Go over it carefully so you will not miss anything. Most employees that are being laid off have only one main concern in mind: they want to get a higher amount of severance pay, so they focus all their negotiation skills and efforts on that portion. But there are other items that may be negotiated, if they only know what to look for.
Here are the points of interest that you should take note of when reviewing the agreement handed to you.
A valid reason for the termination. The business must have a justifiable business reason for laying off its people, and it must be documented. The company owes at least this much to employees, who deserve the right to know why they are being laid off.
Learn more about valid reasons for employment termination in the following slides.
The terms or basis of computation of the severance pay. The severance pay is usually based on terms of service of the employee, often the length of service. In a way, this also recognizes the loyalty they gave to the company during their period of employment; the longer they have worked for the company, the higher their severance pay is likely to be.
Health and insurance benefits. While employed in the company, the employee is entitled to health benefits, such as medical and dental insurance and other healthcare benefits.
You have to look at the terms governing these benefits in the agreement. Will the company stop paying its employer’s share in the premiums on the date of separation, or will it still continue for a period of time (this is referred to as the “employer continuation period”)?
By understanding this portion, you may negotiate an extension of your health, life and/or disability insurance coverages.
The details of the non-compete and confidentiality agreements. The company may feel compelled to exact from the employee a promise not to enter into a business or start a profession that will be in direct (or even indirect) competition with the company, once they are already separated.
This is the non-compete clause in the severance agreement.
The company may also require the employee to agree not to disclose any specific information considered as a trade secret of the company to others, at least without permission or authorization. This is a confidentiality or non-disclosure agreement.
When you find these in your severance agreement, you must take note of the following:
- Scope of the clause and/or agreement. What companies are considered to be in direct competition with the company? What information or “trade secrets” are you not allowed to disclose?
- Geography. Do the prohibitions extend throughout the country, or just within the state where the company operates? This way, if you have plans on striking out on your own and starting your own business that may be considered in competition with your old employer, you may not be held liable if you set it up on the other side of the country.
- Duration of the prohibitions. How long are you supposed to adhere to the non-compete and non-disclosure agreement? What is the timeframe that you must observe?
Unemployment insurance. One reason why it would be better to wait for a severance package to be offered to you instead of resigning voluntarily is the possibility that you may be able to claim unemployment insurance.
Post-employment assistance. Will the company offer help or assistance in you finding another job? Does the employer provide any outplacement services? Will they be willing to provide letters of recommendation should you apply in another company? More importantly, will the service be available to you?
TIPS FOR NEGOTIATING BETTER SEVERANCE PACKAGES
Even if an employee has no choice about the status of his employment with a company, he does get to have a say on how he will take his leave, and that is through negotiating the terms on the severance agreement.
The agreement will be drawn up by the employer and handed to the employee being laid off, but that does not automatically mean that the employee has to agree and go along with everything that is written there.
He, too, can negotiate, especially when he feels that some of the terms are not equitable. In fact, employees are given a specific period of time within which to review the agreement, so they should not feel too pressured to accept and sign the agreement right there and then.
If you find yourself in a position to negotiate the terms of your severance agreement, take note of the following tips.
- Conduct yourself properly during discussions with your employer. Be careful not to take a hostile or offensive stance when negotiating with your employers. You want them to agree with you or reach a compromise with you, not to be antagonized. This may just put you in a bad light, and they will not be so agreeable to some of your points of negotiation. Show them that you are in a good place (and of good mind) to talk about things, and they will be more open to listening to you, and considering your demands.
- Be prepared when you come to the table to negotiate. You should have a list with you of the items on the agreement that you want to discuss. You may also have identified benefits that you want to be included. Make sure you have them ready with you, and that you have done enough research to be able to talk about them with conviction.
- Consider the sufficiency of the cash and benefits that are being offered. Are they enough for you and your family to survive, at least until you have found a new job or another source of income? You have to assess your current financial situation: your current assets and resources, and your expenses. This will help you determine how much you will need financially.
- Examine the company’s past history when it comes to separations. You may not be the first one to be terminated. Look for any precedent that will aid your cause. Look into the severance packages offered by the company to other former employees in the past. This will give you an idea whether you are getting just as much, or less than, they were offered, and give you room to negotiate.
- Consider whether you should hire legal help. Make an effort to know the applicable labor laws that will support your position as your negotiate. However, if you do not feel confident about this, you may want to consider hiring the services of a lawyer, especially one that is familiar with labor laws and cases on separation. You have to be careful, though, since this might be taken the wrong way by the employers, and they will think you are out to sue them. You should also consider the financial ramifications, because legal services do not come for free. You might end up paying more in lawyer’s fees than the actual amount you will get in your severance package.
Your goal, as you make your way out of the company, is to maximize the benefits that you can get from your company. That is why, even as you enter a company as a new employee, you should check whether the company offers severance to its employees, and how much are provided in these packages. Do not be afraid to negotiate. You are already losing your job, anyway, so what else is there to lose?
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