When an employer terminates an employee, it has to decide whether to offer the employee separation pay (severance) in return for a release of claims. (See previous Legal News: Employment Law Weekly Update, May 29, 2012). Employers are generally not legally required to provide separation pay. Some employers choose never to offer separation pay, or to do so only in very limited circumstances. For many employers, though, offering separation pay is almost the default position — they offer separation pay almost as a matter of course to terminated employees. This is no doubt driven in part by a desire to avoid the risk and expense of employment lawsuits. But, is it the right approach? After all, most terminated employees do not file lawsuits, and if an employer offers separation pay to all of them, it will be paying separation pay to a great many individuals who would never have pursued litigation.Instead of presuming separation pay is appropriate in most or all situations, consider a more nuanced analysis using these guidelines as a starting point:

  1. Is separation pay required in a particular situation because of an employment contract or policy. If so, consider paying the separation pay. Failure to do so may give rise to claims under the applicable state wage payment law.
  2. Was the employee terminated for misconduct? If so, in most cases, consider foregoing pay separation pay.
  3. Was the employee terminated for performance reasons? In these situations, consider offering separation pay on a case-by-case basis depending on the circumstances, such as:
  • How bad was the performance?
  • Is this a “high-risk” termination for some reason? For example, did we fail to give the proper counseling? Do we have poor documentation? Are we treating this employee more harshly than other employees in similar circumstances? Did the employee recently make a harassment or whistleblowing complaint?
  • What was the employee’s length of service? Employers generally do not pay separation pay to short service employees unless it is a high-risk situation for other reasons. Be more willing to consider separation pay for long service employees either because: a) terminating a long service employee for performance reasons carries, in many cases, greater legal risk, or b) simply because it is the “right” thing to do for the long service employee.4. Was the employee terminated in a reduction in force? If so, consider offering separation pay as a matter of policy, for two reasons: a) the employee is usually being terminated through no fault of his/her own (again, the fairness issue) and b) reductions in force pose greater legal risk for employers than individual terminations due to lawsuits arising out of reductions potentially involve multiple employees.

Separation pay in return for a release can be a great tool for employers in avoiding legal risk. However, it should be implemented wisely; consider whether it makes good business sense under the circumstances.