A generous severance package makes the transition from full employment to unemployment tolerable for employees who lose their jobs because of downsizing or reductions in force. The customary severance package consists of an agreement or contract between the employer and employee, in addition to a cash amount based on the employee's earnings, tenure and benefits.
Employers use severance packages when they modify their workforce structure, restructure and eliminate jobs. Severance packages have two primary purposes: They provide compensation for employees making the transition from employment to unemployment, and they obtain written assurance from employees to waive their rights to claims for wrongful termination. According to the Equal Employment Opportunity Commission, agreements that contain waivers of civil rights are unenforceable, however.
The customary severance agreement contains the date on which termination becomes effective, the amount of severance pay and other amounts to which the employee is entitled, such as payment for accrued vacation and sick time. In addition, the severance agreement states whether the employer will pay for group health benefits and for what period following the termination date. Many employers who offer severance packages also provide continuation of benefits for three to six months, depending on the employee's tenure and the total severance amount.
An essential component of a severance agreement is the waiver of claims. When an employee signs a waiver, he agrees that he won't seek redress for the termination based on laws such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act or the Older Workers Benefit Protection Act. In other words, when an employee signs the severance agreement, he accepts the employment decision the company has made and releases the employer from any claims he may have regarding unfair employment practices. Severance packages for workers 40 and older must contain specific language about the ADEA and OWBPA to be deemed satisfactory by EEOC standards.
The EEOC strongly recommends that employers give employees 40 and over 21 days to consider the agreement before signing it. Additionally, when employers present severance agreements, employees should seek seek legal counsel before signing the agreement. If the employer and employee renegotiate the terms and conditions of a severance agreement, the 21-day time frame within which to sign starts over. Employees who are provided 21 days to sign the agreement also have seven days to revoke their signature.
Severance payments are usually referred to as "consideration." Consideration is a contractual term that means an amount due in exchange for agreement to certain terms and conditions. The amount of consideration in a severance package varies, depending on the length of employment, the company's financial condition, labor conditions and employment trends. Customarily, severance packages include two weeks pay for every year of employment. For example, an employee who loses his job after 18 years may receive a severance package that includes 36 weeks pay, in addition to company-paid group health benefits and accrued vacation time and sick leave.
Overall, severance packages customarily include a plainly written agreement that employees can understand. This is deemed an ethical business practice that enables an employee's full knowledge of the terms and conditions of the severance package. It also means the employee signed the agreement voluntarily and absent any coercion.
- CNN Money: How Much Severance Pay Can You Expect; Anne Fisher; October 2005
- U.S. Equal Employment Opportunity Commission: Understanding Waivers of Discrimination Claims in Employee Severance Agreements; July 2009
- McGuire Woods: EEOC Severance Agreement Guidelines Provide Tips for Employers and Employees; November 2009
- U.S. Department of Labor. "Severance Pay." Accessed Aug. 16, 2020.
- U.S. Department of Labor. "Wages and the Fair Labor Standards Act." Accessed Aug. 16, 2020.
- NBC News. "While Sears executives get $25 million in bonuses, laid-off workers struggle during Christmastime." Accessed Aug. 16, 2020.
- New York State Department of Labor. "Dismissal or Severance Pay and Your Unemployment Insurance Benefit." Accessed Aug. 16, 2020.
Ruth Mayhew has been writing since the mid-1980s, and she has been an HR subject matter expert since 1995. Her work appears in "The Multi-Generational Workforce in the Health Care Industry," and she has been cited in numerous publications, including journals and textbooks that focus on human resources management practices. She holds a Master of Arts in sociology from the University of Missouri-Kansas City. In addition, she is a certified facilitator for the Center for Creative Leadership Benchmarks 360 Assessment Suite, and is a Logical Operations Modern Classroom Certified Trainer . Ruth resides in North Carolina and works from her office in the nation's capital, Washington, D.C.