Q: Am I Required to Offer a Severance Package?

It depends on your state and the contract you have with your employee. While most states do not require you to offer a severance package, there are a few scenarios where you may need to.

You might be required to offer a severance package when:

  1. It’s in the employee’s contract. Employees in top-tier positions often have negotiate employment contracts that includes a severance agreement if they are terminated. So if it’s in your employee’s contract, you’ll need to offer one.
  2. It’s required by state law. Check your state’s Department of Labor website to be see the local laws that apply. Only a few states require severance packages and even then it’s in special cases like a big layoff or the company went bankrupt.
  3. It’s implied that the employee will receive one. You may be required to give a terminated employee a severance package if you’ve:
    1. given severance packages to other employees with similar a similar rank or position,
    2. circulated a company policy (such as in your employee handbook or wiki) offering severance to a cohort including that employee, or
    3. promised the employee, orally or in writing, a severance package.

Pro tip: Outline your policies around severance packages in an employee handbook; it will make your practices clear if and when it’s time to terminate an employee.

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When might I want to offer a severance package?

Even if you’re not required to, many employers still decide to offer a severance package when:

  • The employee is terminated as part of a layoff.
  • The company has decided to reduce staff by offering early retirement packages.

If you want to offer a severance package, it’s best to work with a lawyer or local HR expert to craft a comprehensive policy.  Expert advice will help you evaluate whether to incorporate your severance offerings into a separation agreement, and relate your termination policy with the company’s recruiting and retention efforts. It will also help you terminate in a compliant way and avoid future lawsuits.

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