May 31, 2020 is a daily online magazine covering small business news. We help entrepreneurs transform ideas and innovations into greatness.

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Terminating Employees


Severance Rule of Thumb

Severance pay is a touchy subject for employers. Although a severance policy is attractive to new recruits, determining severance pay and benefits can be challenging.

In today's business climate, benefits and employee perks are being reassessed as employers struggle to maintain profitability during tough economic times.

Even longstanding company policies, including severance packages, are coming under the microscope in light of recent financial developments.

Traditionally, severance packages have been offered to certain classes of employees as a means of facilitating a smooth exit process. Although employees often view severance deals as an expression of gratitude for years of service, employers have had good business reasons for offering sweet exit deals to exiting employees.

Moving forward, it will continue to be in employers' best interests to provide specific employees with some kind of severance benefits. However, the benefits that are included with severance packages are changing. Here's what you need to know about today's severance packages and how much severance you can afford to offer exiting employees.

Severance Overview

Layoffs and retirement are common scenarios that trigger severance packages. Severance packages typically include a combination of perks including extended pay, insurance, retirement benefits, or stock options.

It's extremely rare for employers to offer severance benefits for hourly workers or low-level personnel. In most cases, severance is reserved for executives and salaried workers who have played an integral role in the organization. Businesses that offer any form of severance need to carefully document their policy in an employee handbook to avoid confusion and misinterpretations.

For employers, the benefit of severance is that it gives them leverage over the employer during and after the exit process. In exchange for severance benefits, exiting employees are typically required to agree to specific terms and stipulations, e.g. not filing to collect unemployment insurance, non-compete clauses, and an inability to sue for wrongful termination. If the employee accepts the severance and subsequently breaches these stipulations, the severance must be repaid to the employer.

Rule of Thumb for Severance Packages

There are no set rules about what should be included in a severance package or how much severance an employer should offer a qualified employee. As a general rule of thumb, executives often receive severance in the amount of a month's salary for every year worked (subject to an 18 or 24 month cap). Qualifying non-executives, on the other hand, usually receive a week's salary for every year with the company.

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