Is There a Right to Severance Pay?

In today’s world, layoffs are commonplace. They sweep through industries and communities, wreaking havoc in the lives of those affected.

Indeed, layoffs have become so commonplace that there no longer is a stigma associated with being let go or unemployed. It seems that, by now, virtually everyone has been the victim of a layoff or has a close friend or relative who has lost his or her job.

One of the main questions that arises at the time of a layoff is whether severance will be paid. Many people operate under the assumption that they have a right to severance pay. There is, however, no general right to severance.

That is, there is no law which states that employers must provide severance pay to employees who are being laid off. Instead, severance is voluntary on the part of the employer. The employer can offer to pay severance or it can refuse to pay severance. In general, it is entirely up to the employer.

Nevertheless, although that is the general rule, many employers have indeed made commitments to pay severance and those commitments often are enforceable in a court of law.

In unionized workplaces, for example, there are collective bargaining agreements which may require the payment of severance in the event of layoffs.

In other cases, individual employment contracts may require the payment of severance to the employee or employees covered by the contract. The courts have held that contracts for the payment of severance can be either written or oral, so employers should take care to avoid making oral commitments to pay severance unless they intend to be bound by those commitments.

In addition, many larger employers have formal, written plans providing for the payment of severance. Such plans are considered to be welfare benefit plans which are subject to the requirements of the federal Employee Retirement Income Security Act (“ERISA”).

With regard to severance plans which are governed by ERISA, employees have the enforcement mechanisms and protections of that federal statute which in general enable employees to enforce claims to benefits governed by the ERISA statute.

In this area, as well, an employer must take care not to make commitments by which it does not intend to be bound. An employer which has a mechanism for evaluating and determining the amount of severance to be paid to individual employees may be held in a court of law to have a severance plan subject to the requirements of ERISA, even if the employer has never complied with the requirements of ERISA by preparing and filing a formal plan.

When an employer does not have a formal administrative mechanism for the determination and payment of severance benefits, then ERISA does not apply. Nevertheless, if the employer has a policy and practice of paying severance benefits, that policy and practice may be held under state law to give rise to a claim for severance benefits by employees who were aware of the existence of the practice and policy and who continued in their employment in reliance on it.

In summary, although employers are not required by law to pay severance, they may agree to do so. Indeed, an employer’s agreement to pay severance may be inadvertent or unintended. That is, a regular policy and practice of paying severance to certain individuals may give rise to an obligation to pay severance to other individuals even if the employer would prefer not to do so.

For employers who wish to avoid this situation, it is necessary to consult counsel and take steps to avoid creating unintended obligations.

For employees who wish to enforce their rights and collect severance under circumstances where the company is not voluntarily making severance payments which are required either pursuant to an ERISA plan or pursuant to the company’s policy or practice of making such payments in the past, the advice and assistance of counsel also will be necessary to determine and enforce the employees’ rights.

In New York State, the Labor Law provides some added protection for employees who are entitled to severance where the employer refuses to pay it. For example, one provision of the Labor Law makes it a misdemeanor for an employer who has agreed to provide severance to fail to do so. In addition, the Labor Law provides that, in certain cases, an employer who has wrongfully refused to pay severance may be required to pay the employee’s reasonable attorney’s fees and, if the failure to pay the severance was willful, the employer may also be liable for liquidated damages in the amount of 25% of the unpaid severance (payable on top of and in addition to the severance itself).

Where there is a written contract for the payment of severance, it will be enforced in accordance with its terms. Thus, for example, if the contract states that severance will not be paid where the termination of employment is due to poor performance, then if there has been poor performance, the employer is entitled to withhold the severance pay.

Employees may assume that severance will generally be payable whenever their employment is terminated, but that is not necessarily the case. The terms of the contract at issue must be examined to determine whether the conditions for the payment of severance have been fulfilled in a particular case.

Employees should not be hesitant about negotiating over the terms of their severance. Indeed, in today’s economic climate, it may be advisable for an employee to negotiate the terms of his or her severance package at the time of hiring. The employee has the most leverage regarding the terms of employment at that time and layoffs are so common that it is wise for the employee to give consideration to what will happen to him or her in the event that the job is eliminated.

Whether the severance negotiations are being conducted at the time of hiring or at the time of termination, the employee will want to consider numerous issues in connection with severance. These issues include: (1) whether the company will pay for the employee’s medical insurance premiums after termination, including any premiums payable under COBRA, (2) whether the company will provide outplacement benefits or, if the employee does not have a need for outplacement services, the cash value of such benefits, (3) whether the company will agree to give a favorable reference and not to disparage the employee, (4) whether the company will pay for the employee to have legal and financial advice in connection with the departure from employment, and (5) whether the company will agree not to contest the employee’s application for unemployment benefits.

For its part, the employer is going to want a release of claims that the employee might be able to bring against the employer. That is the value to the employer of a separation or severance agreement.

The stronger the potential claims that the employee has, the more leverage the employee has in terms of bargaining over severance. Thus, at the time of a termination, the employee should consult with counsel in order to determine whether he or she has viable claims against the employer. Counsel can assist the employee in presenting the strongest possible case to the employer in connection with the request for additional severance and benefits.

Factors that should be considered and argued in support of a claim for additional severance and benefits include: (1) the employee’s contributions to the company, (2) the likelihood that the employee will be severely impacted by the termination and will have difficulty finding new employment, (3) any legal claims that the employee may have based on the employer’s conduct such as claims of discrimination or retaliation or breach of contract, and (4) the employer’s possible interest in obtaining from the employee an agreement not to compete or not to solicit away the employer’s customers and/or employees.

Counsel can assist the employee in presenting his or her case in the most persuasive possible way and also in determining which person within the employer’s organization should be approached. Sometimes it is appropriate to approach the Human Resources staff, but on other occasions it may be advisable for the employee to approach a highly placed executive with whom the employee is friendly. A highly placed executive may be in a position to help the employee get additional severance and benefits that would not be available by approaching the Human Resources or Legal Departments.

In conclusion, both employees and employers need to consider numerous issues in connection with severance benefits -both before a termination occurs and at the time of a termination or layoff. The assistance of counsel can be invaluable in connection with considering such matters and reaching an appropriate conclusion.

Paul T. Shoemaker

August 2012