Planning For The Rebound: Step 17 – Severance Pay Considerations
As businesses begin resuming operations and recalling employees from furlough and layoff, companies may decide they no longer need to recall all employees. Perhaps companies have learned that certain positions can be staffed more leanly or combined, or simply that previous levels of business activity are unlikely to return any time soon. As discussed in Step 3 of this series, others may view recall decisions as opportunities to weed out weaker performers – something either neglected before the onset of COVID-19, or learned while employees were out. Perhaps with so many experienced people out of work, this could be an opportunity to explore upgrading talent.
Regardless, if all employees are not recalled, and especially if recalls are not purely seniority-based, or if new hires are brought on board displacing laid-off workers, there is potential exposure for claims of discrimination and retaliation. Given this – in addition to the desire of most employers to “do the right thing” and avoid negative reputational injury – businesses should consider whether to offer some form of severance to employees who are not recalled. This consideration also raises the question of whether employers should require releases in exchange for any severance offered.
Are employers obligated to offer severance? Severance pay generally is not required by law unless the employer previously has committed to pay it (by employment contract, collective bargaining agreement, or in a furlough letter or severance pay policy or plan), or it is being paid as “consideration” to obtain an employee’s signature on a release/waiver of claims against the employer. Even if an employer has no written severance pay policy or plan, employers should assess whether consistent past practice and oral statements may have created an implied obligation. In addition, employers should assess whether their severance program (particularly any installment payout protocol) may be considered a “plan” governed by the federal Employee Retirement Income Security Act (ERISA) and, if so, comply precisely with its requirements.
How much severance pay? The amount of severance is typically the employer’s discretion. Many employers use a standard of one or two weeks’ pay for every year of service, with minimum and maximum amounts, although formulas vary greatly. For example, some companies “tier” their severance packages based on an employee’s level within the organization (e.g., SVP, VP, Director, Manager). These tiered structures are typically fixed and avoid “special deals.” Special deals offering enhanced or different severance benefits for a select few employees can create the perception of unfair treatment, which can increase the risk of discrimination lawsuits.
Lump sum, or payout over time? Severance can be paid in a lump sum after the release is signed (and any release agreement revocation period expires) or over time at regular intervals such as monthly or at each succeeding payroll period. If departing employees have continuing obligations to the company (e.g., transition assistance, confidentiality, non-disparagement, or related post-employment restrictions), paying severance in installments over time rather than in a lump sum may encourage compliance with the ongoing obligations.
Consider other severance benefits: There are other separation benefits that can be provided, including, for example, reimbursement of employees’ premiums for continuing group health coverage (COBRA coverage), outplacement assistance or jobs training, eligibility for recall to work in the future, more-than-neutral letters of reference.
Offer health benefits only: For cash-strapped employers who might struggle to pay cash severance, offering to pay employees’ health care premiums for a certain period, rather than cash, is an option worthy of consideration. First, continuing health care coverage during a pandemic is undoubtedly an imperative for most employees, and will likely be well received. Conversely, not continuing health care coverage could risk reputational injury to the organization, in addition to conveying a negative message to retained workers that could impact morale and employee engagement. Second, continuing health care would likely provide sufficient consideration to support a release of potential claims, even absent any cash severance payments.
Should employers obtain a release? If a company is going to offer some form of severance, we strongly recommend attempting to obtain a release. Employees in states like California are generally familiar with the concept of severance/separation agreements with attendant releases of claims. We don’t think a request to execute a severance agreement will be perceived broadly as cruel or inappropriate – certainly not incremental to the failure to offer recall. Given that this is a relatively common practice, we also don’t think this will dissipate the good will created by offering severance. Releases should be brief, and written in clear, understandable language. If any workers being offered a severance package are over 40, the specific requirements of the Older Worker Benefit Protection Act will need to be included in the severance agreements, or the releases will not be effective as to age discrimination claims. We recommend that you only use severance agreements that have been reviewed by counsel.
Will severance impact PPP loans? Employers who have obtained funds under the Paycheck Protection Program (PPP) may be concerned that applicable regulations might prohibit use of such funds to make severance payments. Fortunately, the CARES Act definition of “payroll costs” – for which borrowed funds can be used – expressly includes severance payments. Employers should nonetheless assess the potential impact of the failures to recall on their FTE count used to calculate PPP loan forgiveness.
Conclusion: Severance agreements may not be an available option for employers facing challenging staffing decisions while reopening. If possible, however, they can be both a useful and compassionate response to these challenges.
Questions about COVID-19 and the workplace? Contact the Hirschfeld Kraemer lawyer who normally provides your legal advice, or you can reach out to Los Angeles partners Keith Grossman, email@example.com, (310) 255-1821, or Reed Schaper, firstname.lastname@example.org, (310) 255-1801.
Did you miss previous posts in our Planning For The Rebound series? Click on the links below:
Step 1 – Requirements For Returning To The Workplace
Step 2 – Do I Have To Bring Back Furloughed or Laid-Off Employees?
Step 3 – Do Employers Need to Bring Back Under-Performers?
Step 4 – Ready To Go Back To Work? Not So Fast …
Step 5 – Passing the Test: COVID-19 Screening in the Workplace
Step 6 – Deciding Which Employees Can Return To The Workplace
Step 7 – Workplace Safety: Posters Are Not Enough
Step 8 – Safety Tips For Allowing Vendors and Visitors Into Your Workplace
Step 9 – Meal and Break Room Safety
Step 10 – Hygiene Tips For A Safe, Clean Workplace
Step 11 – A Workable Plan For Social Distancing
Step 12 – Dealing With Requests To Work Remotely: Separating Facts From Fear
Step 13 – Is Work Travel A Thing Of The Past?
Step 14 – New Hires and Offer Letters During COVID-19
Step 15 – Addressing Employee Return-To-Work Anxieties
Step 16 – Managing Employee Performance During COVID-19: Not “Business As Usual”
For additional employer-focused information about COVID-19:
Click here to see the Hirschfeld Kraemer EMPLOYER’S GUIDE TO CORONAVIRUS