What Employers Need to Know About Severance Packages in New York

Offering severance pay as part of your benefits package can help you attract top-quality candidates in a tough job market and create a positive brand reputation, but how you do this matters. While more than half of employers report providing severance packages as part of their benefits, only 22% report that they have formal policies in place. Whether or not to offer severance packages is a personal decision, but how to make them a formal part of your business contracts is not. Our team can help you understand when this is a positive move for your business and how to ensure your rights and interests are protected in the process.

The Purpose of a Severance Package

The purpose of a severance package is mainly to make the terminated employee’s life easier as they transition back into the job market. It can provide a much-needed financial buffer during their unemployment period, and acknowledges the employee’s service and contributions during their tenure. Severance packages are generally reserved for situations where the employee wasn’t terminated for a performance-related issue.

Severance packages are highly customizable, depending on the needs and goals of your business. Some companies offer a lump-sum payment or a continuation of the employee’s salary for a specific timeframe. Other common inclusions are prorated bonuses, a short-term continuation of healthcare benefits, and job search assistance.

What you decide to offer in a severance package should be determined by your company’s values and goals. A business and employment law attorney can help you determine what to include and how to add the information to your employment contracts or company handbook.

Are Severance Packages Required by Law?

Neither federal nor New York state law requires that businesses offer severance packages to employees. This means that companies have the ability to decide if severance packages should be a part of their benefits plan.

The only exception to this rule is if a contract between the employer and employee states that a severance plan will be offered upon termination. If the employer does not follow through with this agreement, the employee could have grounds for a lawsuit based on breach of contract and attempt to pursue compensation for the value of the severance plan as well as legal costs and fees.

If your employment contracts state that there will be a severance package, it’s important to understand when this applies and what your obligations are for fulfilling it. Not providing the severance within the allotted time period or trying to pay out less than the contract states could result in legal action.

Reasons an Employer May Choose to Offer a Severance Package

While employees may benefit the most from severance packages, there are perks for your company as well. Offering severance pay can reduce potential liability when an employee has been terminated, support a more amicable employee-employer breakup, and protect the company’s brand and reputation. For example, if the employee was a valued contributor who was let go for unforeseeable circumstances, a strong severance package can go a long way toward maintaining goodwill and showing the company stands behind its values.

Severance packages may also reduce the chances of an employee threatening to sue for wrongful termination. This is a tactic sometimes used by employees if they want to hurt the company, even if they don’t have any legal grounds for the suit. They know that the company will still have to spend time and money on the case and that the publicity is likely to hurt the brand’s reputation. Offering employees a severance package doesn’t guarantee that this won’t happen, but the goodwill can be enough to offset the employee’s initial disappointment and anger.

Legal Considerations When Creating Severance Agreements

If you decide to use a severance agreement in your company, you need to understand what this entails and what your legal responsibilities will be. The best way to do this — and protect your company — is to have a clear agreement outlined as part of the employment contract. This should include aspects such as:

  • Whether a noncompete or nondisclosure agreement will apply
  • How much the payment will be and how it will be distributed
  • Whether any additional nonmonetary benefits, such as healthcare or retirement contributions, will be included
  • Any claims that will be released by the employee’s acceptance of the severance package

It’s also a good idea to ensure that each agreement is tailored to the position and employee, if necessary. While most companies will use a template drafted by an attorney, the benefits or structure offered to a mid-level manager are likely to be different from those offered to a C-suite exec. An attorney should look over every severance agreement before the company representative signs.

Work With an Experienced Business Law Firm to Protect Your Company

The best way to ensure that providing a severance package to employees works for your business is to have the help of an experienced business and employment law attorney. They can help you identify whether a severance plan would be beneficial for your business and what to include. They can also help enforce and ensure your severance package complies with all federal regulations.

Whether you’re still deciding if you want to offer a severance plan or need assistance with drafting or executing an agreement, the team at The Law Office of Vincent Miletti, Esq., can help. Our firm operates in both New York and New Jersey, and you can use our email intake form or call 314-648-2586 for more information.