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The small business owner’s guide to severance packages

Layoffs are spreading and small businesses are no exception. Business owners can prepare with this how-to guide on severance packages.

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Times are still tough in many industries, and small to medium businesses may need to lay off some of their workforces to make ends meet. Depending on the size of the company, the number of employees they are letting go, and the reason(s) for the layoffs, the company may want to offer severance packages for employees who are involuntarily leaving their jobs.

If you are wondering if you should (or have) to offer severance packages for your employees when you let them go, this is meant to be a helpful guide to all things severance for small businesses.

As always, consult an employment lawyer or HR specialist with experience in layoffs and severance packages to determine what you must do to be legally compliant.

What should businesses include in severance packages?

Severance pay is a predetermined amount of money and/or other benefits provided to employees upon termination of their jobs. Because it is not federally mandated or required in all cases, each company is responsible for setting up its own severance agreements, either across the board or on a case-by-case basis for smaller companies.

Companies often pay severance pay as a lump sum single payment, but they may also pay it out through a series of continued paychecks after the company has let the employee go. Larger companies almost always have a severance policy in place to ensure the policy remains consistent.

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Severance packages usually include either one or two weeks of pay per year of employment. Many businesses offer continued benefits, such as health coverage paid for a while after the employee’s final day of work, COBRA coverage for a set time afterward, and outplacement services.

COBRA coverage may be required for companies of a certain size or larger companies. The requirements are determined by the U.S. Department of Labor. Read more here to see if these requirements apply to your company. Outplacement services can help involuntarily terminated employees find a new job through resume services, career counseling, recruiter services, and continued job training.

No matter what a company offers as part of its severance packages, it must lay out the terms and conditions clearly in a written agreement signed by both parties (and any additional affected parties, such as a recruiting agency). Make sure to include employee start and end dates, all compensation in the agreement as well as any other amount due to the employee (unpaid vacation days, for example), and the length of time any additional benefits, such as COBRA, will be offered.

The severance agreement should also include any equipment, intellectual property, or other company property to be returned as a condition of the agreement, as well as a reminder of any nondisclosure or non-compete agreements in place – and the severance agreement always has to include a release of legal liability.

Is my company legally bound to offer severance?

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While severance packages are not required by the Fair Labor Standards Act, there are a few cases in which providing severance pay for employees is necessary or at least preferable. There are some laws that apply and some other considerations for when and how to offer severance.

For example, any severance agreement that is in an employee’s contract is legally binding, and the company needs to honor those terms.

Many executive-level employees will negotiate their own severance package before accepting a job, and those terms must be honored. Because those higher-level jobs often take longer to find, those employees often have a larger severance package than other employees.

Likewise, if the company has a set, written severance policy, the company must comply with those terms exactly.

The larger a company is, the more sense it makes to protect your business by establishing a solid severance policy to avoid complicated questions and potential legal issues when letting employees go for reasons other than poor performance.

WARN Act laws also apply to companies with more than 100 employees, excluding part-time employees. WARN, or Worker Adjustment and Retraining Notification, intends to protect workers in case of mass layoffs or other reductions in force by requiring companies to notify their workers of an upcoming job loss or provide a severance package throughout the same period (usually 60 days).

There are a number of qualifiers for the WARN Act, so make sure to consult with legal experts if your company has an upcoming mass layoff in the future. You can also read up on the WARN laws here, or find WARN guides for employers and employees here.

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One other scenario where a company should offer a severance package (though a little trickier to legally prove), is in its precedent practices. If Company X has previously and consistently provided severance packages, it should continue to do so.

All in all, severance packages give laid-off employees a slight safety net of having some money coming in while they search for a new job. The changing face of the workplace since the beginning of the pandemic in 2020 has caused numerous reductions in forces and even business closures.

We hope these guidelines are helpful in case your company has to go through this difficult process, but always make sure your company’s severance deals are legal and fair by consulting a legal expert.

Joleen Jernigan is an ever-curious writer, grammar nerd, and social media strategist with a background in training, education, and educational publishing. A native Texan, Joleen has traveled extensively, worked in six countries, and holds an MA in Teaching English as a Second Language. She lives in Austin and constantly seeks out the best the city has to offer.

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