Severance pay may protect against litigation

Severance packages, not mandated by law, have been used by companies as a means to help protect themselves from wrongful termination litigation or to maintain their reputation as a solid employer in a time of layoffs.

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But in today’s business world, where dotcom companies are closing daily, and traditional brick and mortar businesses are tightening up their operations, a severance package can be optional. In fact, a recent survey conducted by a Florida-based career management-consulting firm, found that cash severance payments to employees terminated in 2001 have declined by almost 20 percent.

According to the survey conducted by Manchester Inc., a consulting unit of Modis Professional Services Inc., the average maximum severance payment for hourly employees dropped to an average maximum of 24 weeks, down from 30 weeks in 1997.

In addition, the average maximum severance payment for middle managers declined 15 percent in 2001 to an average of 28 weeks – down from 33 weeks in 1997.

John Seraichyk, president of the Barrett Group, a Warwick-based outplacement agency that helps displaced workers find new jobs, said severance packages are usually based on the time an employee has worked for the company.

”It’s really at the discretion of the employer,” he said. “For upper level employees in large corporations, a severance package is usually one year’s salary. With smaller companies it depends on what they can afford to offer an employee. Sometimes that’s nothing.”

Among the reasons for the continued decline in cash severance cited in the survey was that many employers have restructured their workforce in one way or another during the past three decades through displacement of employees. As a result, employee terminations have lost some of their stigma – for both the organizations and the employees.

But according to the survey, as cash severance has decreased, there has been a rise in other benefits, including outplacement assistance, health insurance, and access to Employee Assistance Programs.

”It’s difficult when you have a mass separation,” Seraichyk said. “This is why companies try and use outplacement services. The idea is to get employees focused on the next step of their career rather than harboring any animosity toward the company.”

According to Seraichyk, providing other benefits, besides cash can be equally important for a company.

”A large separation, especially one that makes the headlines can be devastating for a company moving forward,” he said. “People in the company see their friends losing their jobs and they question whether or not they want to work there. Companies need to keep morale up and one way to do that is treating those who are leaving well.”

The survey included responses for 178 organizations nationwide. Among the highlights:

 Health insurance is the most popular severance benefit organizations are providing to employees, with 80 percent of senior-level executives, 75 percent of middle managers and 76 percent of front-line employees receiving it.

 Outplacement assistance is the second most popular severance benefit organizations are providing to employees, with 77 percent of senior level executives, 70 percent of middle managers, and 55 percent of front-line employees receiving it.

 The pharmaceutical/biotechnology industry granted the most generous severance benefits to employees in 2001, displacing the chemical industry, which had awarded the most generous benefits in a previous survey.

 The average severance calculation formula for officers and senior level executives fell to 1.7 weeks of severance per year of service, from two weeks of severance per year of service in 1997. The median severance calculation formula for officers and senior-level executives remained at two weeks of severance per year of service.

The average calculation formula for middle managers rose slightly in 2001, to 1.7 weeks of severance per year of service, up from 1.6 in 1997. The median severance calculation formula for middle managers rose to two weeks per year of service in 2001 up from 1.5 week in 1997.

 Many employers are providing more advance notice of terminations to employees. More organizations are also giving employees “work through” notifications and awarding cash bonuses to those who work up until the “work through” separation date, in addition to receiving their full severance packages.