Orderly Departures

Make sure your severance policies provide a legally secure exit structure and a cushioned landing so former employees won’t be deterred from returning.

By Betty Sosnin Nov 1, 2005

HR Magazine, November 2005

Your company may be prospering. You may even be enlarging your workforce. So you might think there’s no need to focus now on your severance policies.

Many experts would disagree.

The time for HR to make sure severance arrangements are up-to-date, able to withstand legal challenges and ready to be implemented is well before they are needed. And they could be needed at any time.

Whether the economy is expanding or contracting, some observers say, a company may have to cut jobs because of outsourcing, a merger or an acquisition. In fact, with mergers expected to increase in the near term, job losses may not be far behind. Bank of America’s recently announced intent to purchase the MBNA credit card company, for example, is expected to eliminate about 6,000 jobs.

Even without such business combinations in the picture, a company can decide it has to trim costs by reducing its workforce, as Hewlett-Packard did this past summer, announcing it would cut about 14,500 jobs through next year.

The Chicago-based outsourcing and employment consulting firm Challenger, Gray & Christmas recently reported that the total of nearly 712,000 job cuts announced through August was 15 percent higher than the total announced for the first eight months of last year. Some companies with earnings growth are cutting jobs to reduce costs, the Challenger firm said.

Knowing you may have to use your severance arrangements on short notice, you should examine them to make sure they’re straightforward and clear, and aren’t discriminatory in their terms. In addition, some experts say, you should make sure your policy would not be viewed as paltry by talent you might want to attract, including former employees who were severed in the past and have become candidates for rehiring.

Does It Have To Be in Writing?

A fundamental question is whether your company needs a formal, written severance policy or whether it can rely on a core set of actions adjusted for each departing employee.

While it may seem obvious that severance policies should be in writing, there are arguments to the contrary. Some find it difficult to design a severance policy that is quickly adaptable to changes in the economy or that deals effectively with a range of circumstances, from individual separations to mass layoffs.

Moreover, deciding not to put a policy in writing may not make it less formal, says Gary Carlson, HR vice president for the Houston-based Energy and Chemicals Division of KBR, the engineering and construction subsidiary of Halliburton: “If a company doesn’t have a written policy, any voluntary severance it gives may be recognized as policy in court.”

Compensation and legal experts generally maintain that companies benefit from having formal, written severance policies that have been reviewed by legal counsel. Policies in writing “can help shield you from discrimination suits if employees are treated differently during terminations,” says Bernadette Kenny, an executive vice president with the outplacement and career development firm Lee Hecht Harrison, headquartered in Woodcliff Lake, N.J. “Some entrepreneurial organizations make side deals rather than following a stated severance policy. This is neither safe nor wise in this environment. If you don’t want a string of angry employees in the executive suite, it’s best to have a written severance policy.”

Patricia Mitchell, senior vice president of Texas Medical Center in Houston, agrees. For the past 14 years, she says, there have been no legal complaints of any kind resulting from terminations at the medical center, and she attributes that to the clarity of the organization’s severance policy: two weeks of salary for every year or part of a year worked, and outplacement services for three months.

Paul Dorf, managing director of Compensation Resources Inc., a nationwide HR and compensation consulting firm based in Upper Saddle River, N.J., cites another plus: “Having a clean, well-defined and standardized severance policy can also help you plan how much cash you’ll need in a layoff.”

In addition, experts say, putting your policies in writing can:

  • Promote equity and thereby preserve morale among employees who remain.
  • Reduce stress among terminated employees.
  • Help maintain the company’s reputation in the labor market for future recruiting.

Long-Term Impact

Among the reasons for having a clear—and generous—severance policy, some experts add, is the effect it can have on hiring and future business.

“The cost of sourcing and hiring is dramatically reduced by referrals,” notes Sheryl Dawson, CEO of Dawson Consulting Group, an HR and talent management firm headquartered in Houston. “It’s important that employees leave with as little bitterness as possible, since negative feelings will be communicated on Internet blogs and other sites that cater to this information. Former employees can [become] future rehires or customers who can produce revenue for the company when they secure a new position within the industry.

“Remember, ex-employees never leave the available talent pool, even though they may leave the company for another job,” Dawson adds.

Doug Beckstett, another HR expert in Houston, agrees. “You’re always selling your organization in everything you do,” says Beckstett, vice president and chief HR officer for Memorial Hermann Healthcare System, which has 16,500 employees. “How you treat people when they leave dictates how they talk about the organization.”

Memorial Hermann offers two weeks of severance pay for each year of service, with caps at 26 weeks for directors and 15 weeks for other employees. Benefits continue during the severance period. And during that time, departing employees have access to a resource pool for finding jobs both inside and outside the system. “It’s important,” Beckstett says, “to stay true to your corporate values and philosophy during downsizings.”

Rena Lewis, a senior vice president at Lee Hecht Harrison, which recently issued new survey findings on employers’ severance policies, underscores the notion that a company’s severance policy can influence a former employee’s decision on whether to return to the company. Employers sometimes seek to rehire laid-off employees—as many did after downsizings in the mid-1990s—and so it can be in the employer’s interest to make sure severed employees don’t depart with a negative attitude about the company.

Lewis also suggests that job applicants’ views of a company can be colored by the perceived quality of its severance policies, particularly if the applicant has been severed in the past by another company and was given a stingy farewell.

Such considerations, Lewis says, appear to explain why many companies have made their severance terms more attractive. In the latest Lee Hecht Harrison survey, half of the companies that said they had changed their policies had in fact made them more generous. (For more details on the survey’s findings, see “The Numbers on Severance,” at right.)

An additional plus in generous severance benefits is cited by Will Callicott, a spokesman for Westinghouse Savannah River Co. (WSRC), operating contractor for the Department of Energy’s (DOE) Savannah River Site in Aiken, S.C. In the first phase of the company’s three-phase downsizing to reduce its workforce by 2,000 through next year, 625 employees volunteered to be laid off or take early retirement.

When layoffs are about to occur, employees may want to leave a company, Callicott says, “to move, start a business, take early retirement, go back to school or get out ahead of what they presume will be a wave of applicants flooding the local job market.” Whatever the reason, he says, “a generous severance package helps them make that decision.”

A risk in offering generous severance packages, of course, is that it may cause a company’s best workers to seek employment elsewhere because they’re confident that their skills are highly marketable, while less-skilled workers may stay put, knowing they would have a hard time in the job market.

Go It Alone? Or Get Help?

A useful starting point for drafting or revamping policies on severance, says Kenny of Lee Hecht Harrison, is to find out how other companies in your industry handle it. To get such information and produce the most-effective policies, she and other experts say, you should use consultants. Dorf, a consultant himself, says they “can give you a reality check. They have access to good benchmarking data, understand trends and can help with strategic planning.”

Not everyone thinks consultants are necessary for structuring severance policies, however. Robert S. Witten, assistant vice president of human resources for Skyline Steel LLC, a steel manufacturer and distributor with 300 employees in Parsippany, N.J., says his company is rethinking its severance policies and is doing the review in-house because it has the requisite expertise.

The goal is to make sure that the policy is consistent and equitable and that it protects the company through legally binding separation agreements, releases and confidentiality agreements, Witten says. “We also want to treat employees fairly and protect the morale of remaining employees.”

Another firm that developed its severance policy in-house is KBR. “Severance policies should not be viewed in isolation but in the context of related HR policies,” says HR executive Carlson, and the company felt it had good insight into those policies.

“We have a formalized, written severance policy which pays one week’s pay for every year of service, with caps for various levels of employees, and we may adjust this for special events like restructurings,” Carlson says. It’s “a fairly lean severance program, but we let people bank up to 500 hours of sick, personal and vacation hours, which they can cash in if they’re terminated.”

In designing its policies for workforce reduction, WSRC stayed in-house, but it received help from the DOE to ensure a smooth landing for terminated employees. “We are required to give our employees 60 days’ notice, but for security reasons they do not work during that 60 days,” Callicott says. In addition, terminated employees generally receive one week’s pay per year of service, up to 26 weeks. They can also cash in vacation, sick and personal hours and receive help in finding jobs at other DOE facilities.

Keep the Law on Your Side

Employers can shape their severance plans any way they choose, as long as they comply with applicable laws and offer appropriate, nondiscriminatory benefits. For example, while a plan may be structured by department, workgroup, seniority or some other factor, all similarly situated employees must receive equal treatment.

Laurel Landon, an attorney in the Augusta, Ga., office of the Atlanta-based international law firm Kilpatrick Stockton, says HR should make sure all severance policies, agreements and release forms are drafted by an attorney familiar with federal and state employment laws.

Although federal law may not require severance pay for nonunion organizations, a voluntary severance plan could be seen as an employee benefit under the Employee Retirement Income Security Act (ERISA), and thus would be subject to ERISA’s reporting requirements.

Even in the absence of a plan or a legal obligation, a court may determine that a de facto ERISA severance plan exists, based on oral representations, the existence of a fund or account from which benefits are paid, the actual payment of benefits, past practices, reasonable expectations of employees, or the intentions of the sponsor.

Noting that employees 40 or older “fall under special provisions of the Age Discrimination in Employment Act (ADEA),” Landon says: “This requires a company to give these employees a certain amount of time to consider severance agreements, advise them to consult an attorney if they wish and take other special steps.”

Although employers can offer early retirement as an inducement for older employees to leave, such programs are not permitted to discriminate against older workers. It’s illegal under ADEA and the Older Workers Benefit Protection Act, which amended ADEA, for a program to deny severance pay to employees who are eligible for retirement while paying it to other employees.

Having severed employees sign a release, written by counsel, absolving the employer of employment liability must be, among other things, informed and voluntary, and it’s just one of several terms that experts recommend for virtually all severance policies. They say that policies should also:

  • State that the company reserves the right to alter or terminate its severance policy.
  • Specify that the purchase of the business by another company will not require the payment of severance, unless employees are actually laid off.
  • Make it clear that severance pay is intended to provide assistance during an employment search.

In addition, experts say, company authorities should avoid making statements, whether spoken or in writing, such as in employee handbooks, that might be viewed as altering the terms of the policy.

“In my experience,” says Kenny, “if the company behaves professionally, the people being laid off will do the same.”

Betty Sosnin is a freelance writer based in Augusta, Ga.


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