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Friday, April 13, 2007

Why Severance?

Dear Evil HR Lady,

I just read a snippet in one of our trade publications about a company where "total 2006 revenues slipped 7.7% to $73 million and severance expenses from 43 people hit the "cost" line" and I got to wondering about why companies pay severance. Do they have to? Is it a courtesy gesture? And the same goes for pensions... why do some people get them and some people not? How come I don't get a pension if I work for my company for 30 years?


Can I get a package, please?

Dear Package Seeker,

Companies pay severance because it's cheaper than being sued for wrongful termination. In almost all cases (in the United States) employees are "at will," which means you can be fired--or you can quit--at any time for cause or no cause.

Predictably, people do not like to be fired, even if it's a "layoff" and they are assured that they did "nothing wrong." Giving them severance helps keep down the desire to sue. Most companies require you to sign a "General Release" in exchange for this money. This is a document where you agree that the company doesn't owe you anything else and that you won't sue them.

Companies would prefer not to have to give out this money, but even one lawsuit can be very expensive as well as being a public relations nightmare. If you are in any protected class (minority, female, over 40, etc) getting you to go away happily is their biggest concern.

Another reason for severance is to compensate for non-compete clauses. If I require you to sign a non-compete clause that keeps you from working for a year, I may offer you severance in exchange. This gets you to sign, and again, not sue.

So, should you sue when you are laid off? The answer is almost overwhelmingly no. If you are offered a package, take it. The chances of you winning more than you were originally offered, after taking out your lawyer's fees, is surprisingly small, in my experience. But, if you really feel you were discriminated against, contact a reputable labor and employment lawyer (hint: they never advertise on daytime t.v.).

As for pension, it depends on your company's pension plan. I would imagine that after a certain period of time you will be "vested" in your company's plan. For my company, it's 5 years. After I've logged 5 years, I'm guarenteed a pension. I can't access it until I'm 55 and if I've only been here 5 years, it will be pathetically small, but it will be there. (Given that the pension plan doesn't go bankrupt in the meantime.)

Not all companies have pensions and maybe your company's plan is limited to people above a certain salary level, although I would find that strange. (Doesn't mean it isn't true, just strange.)

Hopefully, this answers everything.

Evil HR Lady


Mike Doughty said...

Severence packages were, at one time, largely motivated by feelings of compassion and wanting to "do the right thing" to help laid off employees during the period that they'd be looking for another job. These severence pay plans were modest, based mostly on years of service (1 or 2 weeks' pay per year of service), and pretty much the same for all levels. Some companies had them, and some didn't. Not so in recent history. Severence packages today are largely an exercise in, for lack of a better word, cowardice. They are a CYA action used, as the Evil HR Lady says, so employees won't sue; in other words to prevent companies from actually having to defend their decisions. If you are doing things right (selecting people to cut based on defensible criteria) you shouldn't be afraid of lawsuits. But if you are lazy, in a hurry, don't trust your judgement, or just plain afraid, the severence package is your friend. I have seen people, some of them at the executive level, who were totally incompetent or whose behavior was such that discharge was the proper action, (and everyone knew it) get big severence packages to get them out the door with minimal fuss. This creates a lot of cynicism on the part of competent, "good" employees. Be a screw-up and you can leave with up to a year's pay and a good reference! The lawyers give this advice to Management and they listen, but they really like it because it's easy. In reality, if you do things right the chances of losing an unfair discharge suit is very small, and the costs much less in the long run. There are very limited circumstances where paying someone to leave might be the right answer, but they're few and far between. Today, getting "a package" when you leave a job has become such an expectation in many companies and industries that people hang around waiting to be offered one. Often times they aren't real productive while they wait. This may only enhance their chances of getting one.

Just one old HR person's opinion.

Mike Doughty

Lisa said...

MIke, you about covered anything I was going to say. My one or two word thought on why companies offer severance is for "good will." That was why I did it the one time we had an across the company downsize.

Spudlet said...

Thank you, Evil One, for answering my questions. I know a number of people who are sticking it out in hopes of a severance package. No, I am not one of them! I will have to look into whether my company offers a pension plan though. At the rate I'm going, I may be here for life.

she said: said...

I think pension plans have largely been replaced with stock options and 401k's.

I know from the first year I started working till the time I swung out of corporate America - the amount of companies offering them rose quite dramatically.

Also - I wont be popular with this - but I find it a little ridiculous that people expect a severance package.

Once upon a time you were lucky to just get a last paycheck.

Any company providing one is going above and beyond, no matter what the motive. They don't have to.

I don't know what is worse. A company that has to fire people for making too much money - or a workforce who is so sue-happy, they force companies into this practice.

And basically - the consumer for which none of these people would even get a paycheck - gets screwed.

Evil HR Lady said...

There is definitely good will involved as well. I do tend to focus on the negative side of things, but there is "niceness" involved as well.

Managers and HR hate laying people off. We really, truly do. We like to be nice.

Wally Bock said...

With severance packages there is also the case of the merger or acquisition. I know one young man whose company was bought by a larger company in his industry. His area (IT) was marked for "eliminate duplication." The acquiring company went through the IT staff, offering some the option to work as independent contractors and others severance packages. Help was also made available for finding new jobs. At the end of the day in this particular situation, the IT staff generally feel like they were treated fairly and humanely. In the long run, I don't see how that can be anything but good.

Ibn Tumart said...

Once upon a time you were lucky to just get a last paycheck.

How is this lucky? Being paid for your last week or two of work isn't a privilege, it's a right by law.

Ibn Tumart said...

Evil HR Lady, would you mind if I asked you how you feel arbitration provisions affect severance packages? It seems to me that most companies have some sort of mandatory arbitration clauses that employees have to sign.

How do you think that impacts the worry that departing employees will sue if not given a golden parachute?

apu said...

I think it makes sense especially in cases where employees are fired for reasons beyond their control - like M&As which make certain positions redundant

Mike Doughty said...

Having reread my comment on this subject, I see where it might have come across as, er.......a little cynical (what can I say; I've worked in HR, primarily labor relations, for 30 years). In fact, there are many good applications for severance pay, as several commentors have aptly pointed out. I was a little too focused on what I see as the misuse of these packages. It particularly galls me to see highly placed people get paid large amounts to leave when they should just have just been shown the door because of incompetence, poor judgement, or bad behavior. This is highly visible to every other employee and adds to the above referenced cynicism.

she said: said...

"How is this lucky? Being paid for your last week or two of work isn't a privilege, it's a right by law. "

Not if they go out of business.

It is only in the last 10 years that the work environment is so favorable companies rarely go out of business.

It used to happen a lot. Even with very well known companies.

robert edward cenek said...

Severance packages are in most organizations a CYA activity; however, there still are some firms that do provide the help on the way out for more reasons than legal posturing.

Release agreements are increasingly coming under legal challenge, depending on how they are crafted. anything, they are negotiable, which most people do not realize.

robert edward cenek, RODP
Uncommon Commentary on the World of Work

Anonymous said...

the last 4 people in my position received a severance of 3 weeks for every year to retire early. now, after carring the work load alone for 5 years, the company is terminating me with less than 1 week for every year. Is their any entitlemant here due to past practice? It's the only case I have after all the research I've done. mike