Severance Best Practices Lessen Litigation Risk

In 2008, 93 percent of U.S. companies required employees to sign a release in exchange for severance, up from 76 percent in 2001—a 22 percent increase, according to the 2008-09 Severance and Separation Practices Benchmarking Study, a report by talent management consultancy Lee Hecht Harrison (LHH). "Companies have learned to leverage severance packages to lessen the risk of employee litigation," says Rob Saam, senior vice president and career transition practice leader at LHH.

The new study reveals broad adjustments in severance practices compared with a 2001 study conducted for the firm. In 2008, for instance, 60 percent of U.S. companies had a written severance policy, down from 79 percent in 2001—a drop of 24 percent. But the reason for the falloff isn't necessarily bad: "Companies are considering more factors when formulating severance packages, and the result has been that fewer companies use boilerplate policies," says Barbara Barra, executive vice president—operations for LHH.

Nevertheless, "The value of a written severance policy is that employees know what to expect in the event of job elimination—the amount doesn’t come as a surprise," comments Saam. "It also ensures that all similarly situated employees are treated the same, which lessens the likelihood of litigation. A signed release lessons the likelihood of litigation still more."

Some 1,072 U.S. human resources executives were surveyed online and by mail throughout 2008 for the new study, from a wide range of industries and organizational sizes—a methodology parallel with the 2006 study.

Rise in Employment Agreements, Negotiations

From 2001 to 2008, the percentage of employers who use employment agreements when formulating severance packages more than doubled.

Over the same period, the percentage of employers who say that negotiation played a role in severance packages increased more than twice over:

"Since 2001, employers and employees have become more sophisticated about separation best practices," says Barra. "Employees have taken more control of the negotiation process, and employers have diversified their severance offerings. Both sides are working to arrive at a mutually satisfying solution, which is good news."

Traditionally, severance was based on an employee's years of service, Barra notes. Today, tenure is less important because employees change jobs more often. "After 2001, employees learned to dictate their own severance terms through clauses in employment agreements and strategic negotiation," she says.

"The recession of the early 2000’s might have taught employees valuable lessons about job security," Saam concurs. "Executives are negotiating severance before they are hired, and many are negotiating packages offered to them—rather than accepting the standard package.”

In addition to tenure, factors for determining severance that can be subject to negotiation include:

Growth of Outplacement Services

More employers have adopted outplacement as a solution to preserve their employer brand and reputation, and reduce litigation risks, LHH finds:​

"There is a strong correlation between how a company treats departing employees and its ability to attract and retain top talent now and in the future, particularly when the economy rebounds," says Barra. "Providing a socially responsible and compassionate career transition service is more than the right thing to do, it's the smart thing to do."

"Many employers also take into consideration that the employees they separate may become employees of a customer or vendor or may even eventually 'boomerang' and be hired by the company again in the future," adds Saam.

Another key consideration is to reduce the likelihood of litigation. "Employees in outplacement are more focused on their future career opportunities and less likely to dwell on the termination," remarks Saam.​

Stephen Miller is an online editor/manager for SHRM.

Related articles:

Severance Remains Generous, Despite Recession, SHRM Online Benefits Discipline, March 2009

Amid Global Recession, Severance Seen as Strategic Tool, SHRM Online Benefits Discipline, March 2009

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