Severance Pay; How Do I Handle This As An Employer?

Not many employers take the time to learn about severance pay seeing as not many employees care to talk about it during the onboarding process. Still, it remains one feature that can help you stay competitive as an employer and also help your company stay competitive.

We have put together all the relevant details you need to have in your knowledge bank about severance pay and how to handle it as an employer.

Severance Pay Debugged

If you’re only just coming across the term “severance pay”, your mind will probably be saddled with questions like; What is severance pay? How does it work? Why should I be concerned with severance pay as an employer? How do I even handle severance pay as an employer?

Well, all these questions and more have been adequately addressed in this compact article!

Starting from the basics, Severance pay is a sum of money or an amount (can include other benefits) offered to an employee by an employer upon their exit from the company.

A more robust explanation sees Severance pay as the compensation and/or benefits an employee is given or offered by an employer upon termination of employment. This termination of employment or dismissal from work is usually linked to certain circumstances like offboarding due to company restructuring, downsizing of a company’s workforce, employee retirement, or an involuntary (in some cases, voluntary) layoff or dismissal of employees before the standard notice period elapses. In these instances, employers offer pays and packages to employees as compensation for unemployment. In addition, employees who resign from working at a certain company or whose employment is terminated by the company may also be offered severance pay depending on the company’s policies.

Now, here’s the somewhat tricky part. While employers are not bound by any law to pay severance fee, employees have certain entitlements as workers of a company, one of which is severance pay, where they are entitled to certain benefits for being dismissed from service or employment under certain conditions as listed above.

In other cases, some countries or states are bound by certain laws or acts to protect employees from being treated unlawfully. Under these laws, employees can file a lawsuit against the company should they perceive any form of mistreatment or disservice.

Many employers choose to give their employee(s) severance pay/ package for laying them off. Which is, without any doubt, a strategic move to lessen the effect of an involuntary dismissal and to avoid the possibility of a lawsuit in the future.

How Severance Pay Works

As an employer, you are required by law to give your employee a notice period prior to their termination. Subject to section 11 of the Labour Act, the notice periods are; one day if the term of service is up to three months; one week if the term of service is up to two years; two weeks if the term of service is up to five years; and one month (30 days), if the term of service exceeds five years.

Usually, if an employer fails to give their employee the required notice for termination of employment, the employee is entitled to severance pay and is liable to sue the company if they are not adequately compensated.

Another key piece of information to know as an employer is that severance pay is negotiable. Different factors (like how long the employee has been with the company, their position in the company, the company size if severance pay was included in the contract of service) are taken into consideration when calculating severance pay and for the single reason that no employer knows for how long an employee will work at their company, severance pay cannot have a fixed price.

Why Do Employers Offer Severance Pay/ Severance Packages?

In most cases, an employer will offer severance pay (or packages) to a dismissed employee for reasons like lessening the effect of the dismissal, unjust termination of employment, involuntary layoff, downsizing due to budget cuts, or an immediate discharge from service before the standard notice period is exhausted. As an employer, you can choose to have the employee sign a severance agreement with a non-disparagement clause, a waiver for non-disclosure or asking them not to proceed with any legal suit against the company. This prevents the employee from tarnishing the company’s image in the media.

What to Include in a Severance Package

Severance pay is usually monetary in form of salary continuation in most cases. However, it can include other non-monetary benefits offered to an employee. Depending on the size or capacity of your company, an employer can choose to offer other benefits in the form of;

Insurance packages:

The most common is health insurance. It can also include any other insurance benefits the company is willing to offer.

Outplacement services:

The company can assist the leaving employee in finding or recommending him/her for a new job.

Miscellaneous benefits:

Other benefits that may be relevant or useful to the laid-off employee’s situation may be included in the severance package.

How to Handle Severance Pay as an Employer

Note that not all companies follow the same procedure and every company is governed by its set policies or procedures. However, from data provided by and compared between different companies, employers have handled severance pay in the following way;

First, the employer notifies the employee of the impending termination. Next, the employer schedules a meeting with the employee to discuss subsequent steps. The employer then makes a severance pay/ package offer which comes only after a severance agreement has been signed between both parties. Upon signing this agreement, the employee will receive the agreed upon severance pay/package from the employer.

See prime tips below for more on how to handle severance pay as an employee.

How to Calculate Severance Pay

Considering that not all companies are the same, severance compensation and pay will most definitely vary across different sectors and different job roles. Several factors determine the amount an employee will receive as severance pay like the period they worked at the company, their job position within the company, company size, e.t.c.

A company may choose to pay a single amount or do multiple installments relative to the duration of the worker’s employment or can choose to keep the dismissed employee on the company’s insurance plan for some time after termination.

While these are common practices for determining severance pay, it is not the standard and companies are free to decide what their severance offer will be.

Prime Tips:

• Communicate your company’s severance pay policies to your employee upon employment.
• Remember that severance pay is negotiable and leverage this fact as an employer.
• Take into consideration the conditions surrounding termination to determine if the employee is eligible for severance pay.
• Make sure the dismissed employee(s) is/are aware of how much they are to receive in severance pay and/ or other benefits.
• Always consult your organization’s legal counsel or seek out professional advice from legal practitioners when drafting out a severance pay contract or agreement.
• Severance pay doesn’t always have to be monetary and can also include other benefits (severance packages).
• Lastly, it is best to have written policies guiding severance pay which employees are aware of and agreed to upon accepting the job offer to lessen the chances of conflict in the future.