Severance Pay
The law generally does not require you to provide severance pay to departing employees. However, many employers do agree to provide such payments as part of company policy and in exchange for a release of claims against the company. These benefits can be determined in accordance with your company's written severance policy, or may be negotiated on a case-by-case basis. Severance benefits may be comprised of a lump-sum payment, continued salary for a certain period, payment for health coverage, and/or job search assistance through an outplacement program.
Many employers use a formula for calculating severance based on how long the employee worked for the firm, such as a week, two weeks, or a month of pay for each year of service. Paying in a lump-sum vs. installments over a period of time usually comes down to whether you have the cash to pay in a lump-sum. If you're laying off a number of workers at one time, paying in installments may be the way to go so you can better manage your cash flow. However, the government agency that handles unemployment benefits in your state may determine that your former employee is still receiving wages and therefore, ineligible for unemployment benefits. Check with your state's unemployment agency when making the decision whether to pay severance in a lump-sum or installments.
(The Instant HR Solutions "Next Steps" Corrective Action & Termination Toolkit includes a Separation Agreement & Release that can be used when paying severance to a terminated employee).
Health Benefits
Under the federal law called COBRA, employer must offer terminated employees and their dependents the opportunity to continue health insurance at the employee's own cost, unless the employee was fired for gross misconduct. COBRA does not apply to employers with less than 20 employees. Some states have comparable laws that apply to companies with less than 20 employees, so make sure to check the law in the states where you operate your business.
Unemployment Insurance
Employees who are laid off are considered eligible for unemployment compensation so you should not contest their claims. Benefits are paid by the state from the insurance fund you have paid into as an employer. Your payroll tax rate is affected by your claims experience so you may see some increase. If you are paying severance benefits, some states view severance as continuing wages and will not pay unemployment benefits until severance pay is exhausted. Other states only restrict unemployment benefits if the individual is barred from working for another company while receiving severance pay. Check with your state's unemployment agency to determine how severance pay may impact unemployment benefits.
Vested Retirement Benefits
Check your specific plan documents, but in general, employees who are terminated remain entitled to any pension, profit-sharing, or retirement benefits that are vested at the time of termination.
Unused Time Off
Federal employment laws do not require that you pay for unused vacation, sick or personal time at termination, but some states do, so you will need to check the law in your state. If you have an employee handbook or company policy that states you pay for it, then you must comply with your own policy. Even if you don't have a written policy but your practice has been to pay it upon termination, then you risk a discrimination claim if you pay it to some but not all. Be consistent!
What Are You Legally Required to Pay Employees at Termination? - To learn more about this author, visit Allison Grace's Website.
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Allison Grace
(Visit Allison's Website)
Allison Grace, CEBS, CCP, CMS, is
President and Founder of Instant HR
Solutions and a human resources
professional with more than eighteen years
of experience. As a consultant, Allison
has worked with companies in various
industries including hedge funds,
technology, oil and gas development,
recruiting and accounting.
As a human resources professional, she has
conducted human resource audits and
established benefits plans, compensation
programs, performance review processes,
and employment-related policies and
procedures. Working within the hedge fund
industry, Allison has managed deferred
compensation plans with assets in excess
of $70m, and transitioned them to become
409A compliant.
Prior to her consulting work, Allison
worked in technology, advertising,
publishing, retail, insurance and
non-profit firms and held Director and
Vice President level human resources
leadership positions with such companies
as Register.com, Food Marketing Institute,
and The Thomson Corporation. Allison's
global human resources expertise includes
working with employees in the United
States, United Kingdom, Canada, France,
Germany, Eastern Europe and Africa.
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