Parting Gifts

Give to employees when they leave, so you'll get more while they're here.
Magazine Contributor
3 min read

This story appears in the January 2001 issue of Entrepreneur. Subscribe »

When employees resign or are terminated, you don't have to give wages or benefits beyond paying them for the time they worked. Even so, most entrepreneurs offer some sort of severance package to departing employees.

An attractive severance policy can benefit your company in two key ways, says Wayne Hersh, a labor relations and lawyer with the firm Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone in Irvine, California.

It can aid in hiring and retention. A severance policy that offers, for example, one week's for each year of service departing employees have put in may be an attractive benefit. Of course, you can exempt employees who are terminated for cause. You may also include other restrictions, such as disqualifying employees from the severance package if they go to work for competitors or disclose confidential information.

It can be used as a tool to obtain a release or waiver of claim. For example, you may offer a severance payment on the condition that the employee agrees not to sue you for any real or alleged employment-practices violations. Employees don't have to sign such agreements, but if they don't, you won't have to pay any severance compensation.

Hersh says severance packages grew out of negotiations between labor organizations and employers in the last century. Today, severance compensation may include cash (paid in a lump sum or in installments), continued benefits or even stock purchase arrangements.

In putting together a severance policy, Hersh suggests you take a look at your marketplace. Are similar companies offering severance packages? If so, make yours competitive. If not, consider putting those dollars elsewhere. Then think about what you want to accomplish with your policy. Do you want a benefit that attracts new employees, a program that promotes longevity, a tool that discourages workers from going to competing companies or a device that reduces employment-related litigation? You also have to decide whether to offer a standard package to every employee or negotiate individually based on specific circumstances.

Depending on how it's set up, your policy may fall under ERISA (Employee Retirement Income Security Act); if so, you'll need to be sure it meets federal requirements. Before you implement any general severance policy or specific agreement, have an attorney review it to be sure it meets any applicable statutes and is not discriminatory.

Jacquelyn Lynn left the corporate world more than 14 years ago and has been writing about and management from her in Winter Park, Florida, ever since.

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