The decision to terminate an employee is often one of the most difficult decisions that an employer must make. Apart from the inherent personal discomfort that accompanies termination, a minefield of legal issues exists and has the potential to result in contentious litigation. Severance pay, however, can be a valuable tool to minimize liability and the collateral damage that can result from the termination of an employee.

THE FOLLOWING IS A LIST OF SEVERANCE BASICS EMPLOYERS SHOULD KNOW:

IS SEVERANCE PAY REQUIRED BY LAW?

An employer is not obligated to pay an employee severance unless it has agreed to do so in advance, such as in an employment agreement, personnel policy, employee handbook or collective bargaining agreement. Otherwise, an employer is free to terminate an employee without severance pay regardless of the employee’s length of the service, position or salary.

WHY SHOULD AN EMPLOYER OFFER SEVERANCE?

While severance pay is only required when the employer is bound by contract, a cost-benefit analysis often motivates employers to offer severance to protect the employer from litigation related to the discharge of the employee. Regardless of whether an employee is considered “at-will,” an employee can bring claims for wrongful termination based on a number of factors including age, race and religion. Defending these claims can be expensive and time-consuming. Employers may also consider paying severance to reward an employee’s good service, to ease the burden of loss of employment and to mitigate the negative effects on other employees.

IS A WRITTEN SEPARATION AGREEMENT REQUIRED?

Severance pay should always be accompanied by a written separation agreement which not only sets forth the terms of the severance pay, but also, among other things, includes a release of all claims the employee had or may have against the employer. The separation agreement can be tailored to prevent the employee from competing with or disparaging the employer and soliciting the employer’s customers and employees. In addition, the separation agreement can require the employee to return all company property and keep all details of the severance payment confidential.

HOW MUCH SEVERANCE SHOULD BE PAID?

A separation agreement must be supported by sufficient consideration. In other words, the employer must pay the employee more than the employee was otherwise owed based on the work he or she actually performed. The amount of severance can be structured as a flat fee or a figure derived from the employee’s salary over a certain number of weeks. For more information, please contact Daniel B. Fitzgerald (dfitzgerald@brodywilk.com).