Severance Pay Plans (United States)

This Wisdom of the Crowd (ACC member discussion) addresses how companies handle severance pay plans when a former employee finds new employment, under US law. This resource was compiled from questions and responses posted on the forum of the Employment & Labor Law ACC Network.*

*Permission was received from the ACC members quoted below prior to publishing their forum comments in this Wisdom of the Crowd resource.

Question:

When your company provides a severance pay benefit in the U.S. in the form of salary continuation for a set period of weeks or months to a terminated employee, do you provide the salary continuation regardless of whether the terminated employee finds a new job, or do you discontinue the salary continuation early if the former employee finds comparable employment during the designated severance benefit period? For example, if you offer four months of severance pay and your former employee finds replacement employment two months in to the severance pay period, do you discontinue severance pay at that point or continue for the full four months in any event? Appreciate any perspective.

Wisdom of the Crowd

• Response #1: One of our goals for severance is to get closure, so we do not discontinue if the employee finds another job.ⁱ

• Response #2: We have two different approaches. We maintain a sub-pay plan in most states and the sub-pay plan provides for transitional pay benefits consistent with normal payroll. Benefits are contingent on a person collecting unemployment. New employment would disqualify a person from unemployment so the plan then pays out 95% of the balance. In the states where there is no sub-pay, we do a traditional severance, which continues to pay regardless of re-employment. The exception in that case is a re-hire, under which circumstances we cancel the severance.ⁱⁱ

• Response #3: At our company, we pay regardless. The severance is the consideration we receive for the full release of claims the terminated employee may have against the company. If you cut back on the salary continuation, you may call into question the release. I am not aware of any company that stops salary continuation once the terminated employee finds another job, but some may do so. It runs into administrative issues. What if the salary for the new job is less, but bonus and equity are more, or potentially more? How do you track this?ⁱⁱⁱ

• Response #4: We provide salary continuation regardless of whether they find a new job. When I was in private practice, we had some clients who cut off severance if an employee found a new job, but it was very difficult to manage, and we essentially had to rely on the employee to let us know when they found new work. Although part of the purpose of severance is to bridge an employee until they are able to obtain new employment, another purpose is to recognize their past service to the company, which is not impacted by whether they find a new job.^iv

• Response #5: We would pay it all whether or not the former employee found another job during the severance period.

• You did not disclose if a release is being obtained in exchange for the severance but if so, I would strongly discourage reneging on paying out all of the severance. By so, you might just give that former employee an avenue to attack the validity of the consideration for the release.^v

• Response #6: It depends on the type of severance. If it's a downsizing or something similar and the severance period is longer than a couple of months, we will adjust the severance payments depending on whether the person got a job. If the severance is for a singular termination and we want a release of claims in exchange for the severance payments, we pay regardless to get, what someone else stated, closure.^vi

• Response #7: We don't do salary continuation severance anymore, but when we did, we discontinued only if the employee became re-employed at one of our companies during the payment period.^vii

• Response #8: I agree with [Response #4] – the severance isn't about providing income only while they are unemployed, but it is consideration for getting a release. We have had very few claims/suits and while it's hard to say exactly why, I feel our liberal severance policies are the reason.^viii

• Response #9: My company used to discontinue paying severance when a new job was obtained. However, that is difficult to track. Now we typically pay severance, when approved, through lump sum, unless the departing employee is subject to a non-compete agreement. In that instance, we spread the payments over the duration of the non-compete period.^ix

• Response #10: From a contract law standpoint, unless the severance agreement (or your published company policy) says that it's essentially unemployment insurance for up to X weeks or until the departed employee find re-employment (whichever occurs first), I agree with the prior cautions that you are now undermining the (contractual) consideration for the departing employee having waived his/her claims against you. Know, too, that even with such severance consideration, the EEOC and NLRB are taking expansive interpretations of what rights an employee cannot ever waive regardless of how much they're paid as consideration. (For example: http://www.shrm.org/hrdisciplines/compensation/articles/pages/eeoc-severance-agreements.aspx)^x

• Response #11: In my experience, cessation of severance payments upon the former employee's commencing new employment should be expressly provided for in the severance agreement. This avoids potential uncertainty regarding the consideration for a release.^xi

• Response #12: Our severance pay is typically consideration for something, like a (mutual) release or a continuing non-comp. With that in mind, it seems inappropriate to reduce it so we don't.^xii