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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:
- 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.
- 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.
- It’s implied that the employee will receive one. You may be required to give a terminated employee a severance package if you’ve:
- given severance packages to other employees with similar a similar rank or position,
- circulated a company policy (such as in your employee handbook or wiki) offering severance to a cohort including that employee, or
- 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.
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.