Whether because your company is going through layoffs, or the time has come to let an employee go their way, the day will come when you need to understand how to put together a severance package. The Fair Labor Standards Act does not require you to pay severance when you separate employees from your company; however, many companies do so voluntarily. When your company is faced with this decision, it’s advisable to know how to put the package together.
Calculating an Appropriate Severance
Most severance packages provide employees with one week of salary for every year they worked for the company. As such, an employee who worked for five years should receive five weeks of salary. Most companies base their calculation on the employee’s current pay rather than from an average. Averaging the wage of a longer-term employee means paying them much less because they most likely earned less during their early years at the company. It’s an insult to injury and entirely unnecessary, so stick with calculating the package based on the individual’s current pay.
You must also pay employees for unused vacation/sick leave accrued. However, you do not have to pay employees for any unused vacation/sick leave that exceeds the number of days they are allowed to carry over from the previous year.
If your company offers retirement packages or other investment opportunities, you will need to provide employees with information on how they can recover their contributions or transfer them into another account that they have sole control over.
Finally, you will need to pay a separating employee any commissions they are due as part of the severance package. When the person is in a sales position, one way to do this is to average their annual income from commission sales from the previous year and divide it by 12. This figure can be multiplied by three months to arrive at a reasonable payment for estimated commissions for most sales professionals.
Provide Solid Information About COBRA
COBRA allows employees to continue using company health benefits under a group plan. However, it doesn’t last forever, and employees have a limited period to use these benefits, and they must do so at their own expense. Employees faced with separation will have lots of questions regarding their health insurance benefits. The more information you have available, and the more explanations you provide, the easier the separation will be for both you and the employee.
Provide Information About Non-Compete Clauses, Confidentiality Agreements, and a General Release of Claims
Every company deals with these in different ways, and separating employees may not feel bound by them when separated with or without cause, such as for falsifying timesheets. However, non-compete agreements and confidentiality agreements are valid following an involuntary separation. It is vital to reiterate company policy regarding both to separate employees.
There are some exceptions to the enforceability of non-compete clauses and confidentiality agreements. These include breach of contract on the part of the employer or provisions that render the contract unenforceable. Often, separated employees will challenge separation agreements that unduly prevent them from accepting gainful employment in their field, which is why it is crucial to verify that your contracts adhere to the law. Finally, provide the employee with a general release of claims and covenant not to sue. Most companies will require this release as a condition of accepting the severance package.
Contact Greenlink Payroll at (480) 385-2525 for more information about how to put together a severance package. We can help you determine the most effective ways to do this based on your specific needs and requirements.