When conducting a layoff, it’s often customary to design severance packages for outgoing employees. A severance package is an agreement between a departing employee and his or her employer. Severance pay is generally a matter of agreement between an employer and an employee or the employee’s collective bargaining representative.

According to SHRM, “there is no legal obligation under the federal Fair Labor Standards Act or any other alternative federal law to provide severance pay to terminated employees. However, many unionized employers may be obligated to provide severance pay benefits under the terms of a collective bargaining agreement, and some nonunionized employers may be obligated to do so in accordance with any relevant state or local law provisions.

Why should you consider offering severance packages?

There are so many reasons to offer severance when conducting a layoff. First and foremost, severance packages can help avoid lawsuits. It’s common to make the severance payment contingent on the signing of various legal releases. This can provide solace for employers who are concerned over the possibility of legal action against them. Further, the more “taken care of” the employee feels, the less likely it is that he or she will initiate legal action. 

Severance packages also help companies remain competitive in the marketplace. Companies that have robust severance packages in place are generally more attractive than those who don’t. Setting severance programs up in advance can be a serious competitive advantage in the battle to attract employees. 

How should you design a severance package? 

First, employers should decide who is eligible for severance packages. Makes sure you thoroughly consider the tax and legal implications of your decision. 

Next, decide on what you’re able to offer. It depends on your company’s financial standing, of course, but in general, more is better than less. According to the IPMA, employers should set minimums and maximums for the payments. “After deciding to implement a severance pay policy, an employer should design appropriate payment amounts by setting maximums and minimums. Employers typically offer one week of severance pay for each year of employment. Once an employee is tenured, he or she would receive two weeks of severance pay per year. No plan generally offers severance pay over one year or less than one week.”

Finally, make sure you document the process thoroughly and put the policy in writing. While the specifics of a severance package can vary case-by-case, having a solid framework and copious backup documentation in place will make life easier down the road and avoid possible discrimination claims.